The IPL newsletter: Volume 18, Issue 364

The Future of Global Value Chains

Koen De Backer and Dorothee Flaig, OECD
The rapid growth of global value chains (GVCs) has been an important driver of globalisation during the past decades. But the international fragmentation of production appears to have lost momentum and GVCs seem to have stalled in recent years. The world economy is facing a number of structural shifts that may dramatically change the outlook of GVCs in the coming years. The empirical evidence evaluating the potential impact of these shifts however largely lags behind, which makes these discussions somewhat speculative. By describing how these shifts will likely evolve over the next 10 to 15 years and calculating their effects on global production and trade, the scenarios in this paper offers new – empirically funded – insights on the future of GVCs.

Towards Cohesion Policy 4.0: Structural Transformation and Inclusive Growth

John Bachtler et al., Regional Studies Association
As the debate on the direction of the EU and the post-2020 Multiannual Financial Framework intensifies, there are important questions about how the EU can best deploy its budgetary resources to meet the challenges facing the Union. The continuing effects of the financial, economic and migration crises are associated with reduced confidence and trust in democratic institutions and politicians, and a rise in populism, threatening the unity of the EU. A major cause is the unequal impact of globalization and technological change on different parts of the EU. This paper prepared for the 7th Cohesion Forum argues that the EU not only needs to accelerate sustainable growth but also to resume convergence so that all parts of the EU are able to exploit the opportunities from the globalization of trade and technological change.  It proposes a new EU strategy for sustainable growth and structural transformation, setting out a common policy vision and a coherent framework for all EU policies – through regulatory reform, directly managed and territorial policies with a collective focus on improving the ecosystems for structural change at different levels.

The challenge of economic change for Europe The past three decades have been characterized by trade liberalization, the rise of global value chains and global production networks. The integration of emerging countries has challenged the EU’s attractiveness as a production location, because of import competition and off-shoring. Further, technological change and digital transformation (the fourth production revolution) is associated with jobless growth and concerns that the EU is falling behind technologically. Europe generally has a strong position with respect to advances in technology, value added, productivity, profitability and profits, but there are important questions about its technological leadership.

Opportunities
There are major opportunities from structural change that the EU is well-placed to exploit. The cost advantages of some emerging economies are eroding, labour costs are becoming a less critical factor in location decisions, and some supply chains are being shortened to ensure greater control. These trends do not guarantee the renewed competitiveness of developed economies but depend on the ability of developed economies to effect the necessary structural transformation. Structural change across the EU requires a different policy and institutional focus on ‘ecosystems’ of open, interconnected networks of stakeholders, cooperating through strategic partnerships able to respond rapidly and flexibly to technological, market and social changes. Disruptive innovation and creativity require multidisciplinarity and open models of collaboration. The support of environment for such ecosystems will unavoidably need to be tailored to specific national, regional or even local contexts. Policy packages need to be integrated and coordinated, delivered at a national, regional and local levels, while being adapted to the needs of different territories.

Structural transformation and productivity challenges for the EU
The current economic situation in the EU is characterized by a persistent low labour productivity growth, at below one percent per year. Research suggests that the main source of the productivity slowdown is not a lower rate of innovation by the most advanced firms, sectors or regions, but rather a slowing of the pace at which innovations spread throughout the economy. At regional level, there is an increasing productivity gap between leading ‘frontier’ regions and lagging regions, the gap that has grown by 56 percent between 1995 and 2014. Consequently, most of the inequalities across EU countries are now accounted by differences within rather than between countries. Thus, while EU market and economic integration has been a successful convergence machine for countries, these gains have not been distributed equally inside each country. These differences cannot be addressed by compensatory policies relying on income transfers. The adaptation to the specific shocks on regional economies generated by globalization and market integration require differentiated (or place-based) strategies. With many frontier regions being capital cities or other major urban areas, there is a risk of increasing economic and social disconnection between the ‘motors’ of EU growth and other regions.

Developing a new policy framework for structural transformation
Renewing the successful European economic growth model depends on its ability to reduce the increasing productivity gap between ‘frontier regions’ and other parts of the EU, in particular the rate at which the diffusion of innovation and structural change takes place. Research shows that there is untapped potential to increase country-wide productivity by improving the performance of regions.

The challenge for EU and Member State policymakers is to develop or adapt policy frameworks and strategies that will stimulate sustainable growth, in a manner that ensures greater inclusiveness, especially in access to employment and capacity for entrepreneurship. This demands a more granular approach to structural policy, tailored better to the specific conditions of the different types of regions and communities across the EU. Different strategies are needed for frontier regions, intermediate regions (some catching up but others only keeping pace) and lagging regions.

Existing EU strategies – from Lisbon/Gothenburg to Europe 2020 – have been only partially successful, with limited results in relation to the scale of the challenge. Notwithstanding certain achievements, strategies have been over-ambitious in relation to the resources available, the deficits in governance (especially on coherence and the coordination of policies) and the performance of interventions. Importantly, policy responses have given inadequate recognition of the spatial unevenness of current and development needs and challenges for economic growth and development in the EU.

Looking forward, any new EU strategic approach needs to recognize the lessons from the past and be realistic about what can be achieved. With relatively limited budgetary resources at EU level, the EU will need to establish the following principles for a new EU strategy.

• Focus on a limited number of key priorities that collectively promote accelerated innovation, structural transformation and inclusive and environmentally sustainable growth.
• Encourage more effective and efficient governance to ensure institutional coordination, and integration horizontally across the policy domains at EU, Member State and regional levels, and vertically between EU, national and regional levels.
• Promote structural reforms and investment in institutional capacity to optimize the conditions for reform and investment, particularly in the regulation of labour markets and other areas;
• Ensure territorial and social inclusion, by taking account of territorial differences in the formulation and implementation of policies.

The critical requirement is a coherent, consistent and mutually enforcing policy framework. Sectoral policies cannot deliver on a new EU agenda without integrated territorial policy packages. Equally, integrated territorial policy approaches cannot deliver prosperity and inclusive growth in the regions without well-designed sectoral and structural policies and reforms.