Global Value Chains for an Asian Century

John West
Adjunct Professor
Sophia University, Tokyo

In my recent book on the Asian Century, I argue that Asia is sitting on a knife edge. The potential of the region to generate good and happy lives for its citizens is enormous. But the requirements of success and the risks of failure are equally enormous.

Asia's stunted economic and social development

It is true of course that most Asian economies have achieved stunning development over the past decades. But despite the region's rapid rise, Asia is suffering from stunted economic development. No major Asian economy has caught up with global leaders like the US and Germany in terms of GDP per capita and living standards, and there is little likelihood of such catch-up occurring over the foreseeable future.

It is also true that China, India and Indonesia are becoming major economic and political powers. But their huge economic weight is due to their large populations, more than their levels of economic, business and technological sophistication which remain modest overall.

Most Asian economies have also enjoyed dramatic reductions in extreme poverty. This has given rise to much talk of Asia's rapidly emerging middle class. But despite the hype of Asia's emerging middle class, the reality today is that only a small share of Asian citizens could be described as middle class, and the middle class is receding in Japan and Korea along with rising inequality and poverty. Today, half of Asia's population is stranded between poverty and the middle class, living in a zone of vulnerability and precarity. Indeed, escaping extreme poverty is only the first step in a long journey towards having a decent and meaningful life.

Challenges for an Asian Century

If Asia is to realise an Asian century where most economies are with middle class societies, I argue that they must tackle "seven challenges for an Asian Century", namely : (i) Getting better value out of global value chains; (ii) Making the most of urbanization's potential; (iii) Giving all Asians a chance; (iv) Solving Asia's demographic dilemmas; (v) Fixing Asia's flawed politics; (vi) Combating Asia's economic crime; and (vii) Living together in peace and harmony.

While all of these challenges are of critical importance to Asia's development, there may be none more important than the first, that of getting better value out of global value chains (GVCs). Participation in GVCs have provided many Asian economies with a fast track to development. In particular, China and most ASEAN countries have received large inflows of investment from multinational enterprises (MNEs) from advanced economies, which have established factories for manufacturing electronics, clothing and footwear, toys, motor vehicles and many other products. This has been substantially responsible for high rates of economic growth and poverty reduction.

But for the most part, China and the ASEAN, remain in a subordinate role in these GVCs, which are led by MNEs from advanced countries. China and ASEAN mostly undertake low value added activities, like assembling electronics or undertaking "cut, sew and trim" of clothing. And GVC-based development may be coming under threat, in light of recent evidence of GVCs contracting, as MNEs have be 'onshoring' production to be closer to major markets.

Asia's GVC successes, such as they are, have been mainly in the manufacturing sector. In contrast, the services sector in most of Asia's emerging economies is bogged down in traditional services with low productivity. Even in Japan and Korea, productivity in the services sector is only half that of the manufacturing. Outside the services dynamos of Hong Kong and Singapore, the only real success stories in services GVCs are those of India and the Philippines in the business process outsourcing sector. But even here, much of the focus is on low value added activities like call centres, and the Philippines especially is still very much in a subordinate position vis-a-vis MNEs from advanced economies.

Urgent need for structural reform and trade liberalisation

Most Asian economies have an immense structural reform agenda to tackle in order to "get better value out of global value chains". This means substantially upgrading economic, business and technological sophistication through investments in human capital, improving infrastructure and connectivity, reforming corporate governance, tackling corruption, responding to demographic dilemmas, capturing the potential of the digital economy, to mention just a few. This is the only way that emerging Asian economies can become GVC leaders.

But the unfortunate reality is that most Asian countries -- notably regional leaders like Japan, Korea and China -- have been slow to respond to the region's structural reform imperative. Indeed, according to latest annual survey of the Pacific Economic Cooperation Council (PECC), failure to implement structural reforms is one of the top-5 risks to the region's growth. Unless, radical structural reform is implemented, there is the grave risk that most of Asia's emerging economies will find themselves in a "middle income trap".

Asia is also now increasingly haunted by the spectre of protectionism. Over 44 percent of respondents in PECC's annual survey selected increased protectionism as a top 5-risk to growth for their economy. This could undermine the potential for GVCs to remain a driver of Asian growth. Asian leaders are wont to criticise advanced economies like the US and Europe for rising protectionism.

But the reality is that all economies are just as guilty of protectionism, if not more so. The Global Trade Alert reckons that 73.5 percent of G20 exports have been impacted by some kind of trade restricting measure. And according to the OECD, countries like the Philippines, Myanmar, China, Indonesia, India, Malaysia, Lao PDR, Korea and Vietnam have very restrictive policies towards inward foreign investment, even though such investment is key to participating in GVCs.

For a region like Asia, whose development has been so dependent on trade and investment and GVCs, the right response to protectionist threats is accelerated trade and investment liberalisation, not imposing restrictions. But this means improving public support for open trade and investment by ensuring that all parts of our communities benefit from Asia's rapid growth.

The recently agreed TPP-11 (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) is one very important initiative in terms of improving the prospects for GVC-driven development. Indeed, it covers a host of issues which are relevant to GVCs like investment, services, and intellectual property. But it only includes a small group of countries from the Asia-Pacific, and must be expanded to include other economies, still on the basis of the agreement's high standards.

The Regional Comprehensive Economic Partnership (RCEP), the other major trade negotiation underway in the region, is nothing short of a great disappointment. Its scope is very limited. It does not seriously tackle issues like services, investment and intellectual property which are critical for GVCs. It is also lacking in any meaningful ambition to advance trade and investment liberalisation. Moreover, it is far from clear if RCEP will ever be concluded, as deadlines get extended year after year. Unless these RCEP talks get serious, the region's aspiration of Free Trade Area of the Asia-Pacific will remain a pipe dream.

Fostering socially responsible GVCs

Beyond structural reform and trade and investment liberalisation, Asia also has a big agenda in fostering socially responsible GVCs, with socially responsible business practices, which are essential for decent middle -class societies. The widespread occurrence of labor rights and other human rights abuses in Asia's GVCs highlights how far Asia is from this aspiration.

How can such abuses happen in countries that seem to have made much such economic and social progress? In some cases, there are no appropriate laws and regulations in place. More often, where laws and regulations do exist, they are not effectively enforced. All too often, these abuses take place in special economic zones which are very light on laws and regulations, and where foreign investors are pretty free to do whatever they want. And while most MNEs talk proudly of their corporate social responsibility policies, there is all too often very little follow through.

Asian governments need to take more seriously the need for socially responsible GVCs, and work in partnership with business, trade unions and other civil society groups towards that end.

Conclusion

For the 21st century to be an Asian Century, with advanced economies and middle class societies, governments in the region will have to show much greater ambition and action in tackling our "seven challenges for an Asian Century", most notably the challenge of getting better value out of GVCs.

References

Asian Century... on a Knife-edge -- A 360 Degree Analysis of Asia's Recent Economic Development. John West. Palgrave Macmillan, 2018.
Accessible via Open Access.
https://link.springer.com/book/10.1007/978-981-10-7182-9#toc

Pacific Economic Cooperation Council. State of the Region 2017-2018.
https://www.pecc.org/resources/regional-cooperation/2516-state-of-the-region-2017-2018/file