Prepared for the Investment Climate Unit International Finance Corporation The World Bank Group
Oscar H. Farfan
Key words: commodity dependency; global value chains; economic upgrading; systemic competitiveness; industrial policy____________________________________________________________
The views presented in this document are those of the author and should not be attributed to the World Bank. Special thanks to Gary Gereffi, Professor at Duke University, and Uma Subramanian, Senior Specialist at the International Finance Corporation—The World Bank, for contributing to, and making this publication possible.
This paper uses the Global Value Chain (GVC)framework to discuss commodity dependency and options for economic upgrading in small developing countries. GVC analysis differs from comparable approaches in that it looks at the dynamics of firms/countries within global production networks and focuses on productive “systems” as opposed to sectors or industries in isolation. Examining global commodity chains through the GVC lenses leads to the conclusionthat inserting small developing countries into global markets through commodity exports is not sufficient to sustain real income growth, and may even prove detrimental to their long-term development prospects. Only by virtue of upgrading export industries – which entails moving towards differentiated products with a higher content of technology, skills and innovation – will developing countriesbe in a position to seize the opportunities brought about by globalization. Small economies that overrely on primary industries are faced with a host of constraints when attempting to initiate a process of structural upgrading. GVC analysis allows to distinguish between external and internal barriers. At the external or global level, the power dynamics in most commodity chains is shifting againstproducing countries, as traders, processors and retailers located in consuming markets secure dominant positions. In such asymmetrical power structures, small producers are finding it difficult to move away from low-margin processes and capture some of the downstream value derived from activities such as design, marketing and retailing. Diversifying into industries that are technology-based orskill-intensive, on the other hand, poses more challenging obstacles due to the rapid pace of technological change, the widening technological gap between small and large developing countries, and the path-dependent pattern of technological innovation. At the internal level, small producers are unable to respond to external challenges because of illfunctioning productive systems that lack the scaleand coordination capacity required to serve global chains efficiently. In addition, poor framework conditions and the absence of dynamic drivers of industrial growth – including skills, technology and innovation – inhibit to a large extent the emergence of industrial capabilities. In light of the host of both external and internal barriers to economic upgrading, this paper argues that largedeveloping countries, offering either scale or agglomeration economies, are in a more suitable position to take advantage of development opportunities within a context of rapid globalization. In the case of small developing countries, escaping commodity dependency requires massive, and arguably more autonomous, efforts to break with structural bottlenecks. Such efforts should not be limited to improvingframework conditions or gaining market access in rich countries, but most fundamentally, seek to address technical, managerial and coordination problems at the micro level. This, in turn, calls for a re-evaluation of industrial strategies geared towards building local industrial capabilities and enhancing the systemic competitiveness of domestic production chains. The experience of small...