Harnessing Global Value Chains for Regional Development: How to Upgrade through Regional Policy, FDI, and Trade

In today’s increasingly interconnected global economy, place-based development strategy must be strategic towards leveraging global economic opportunities. Riccardo Crescenzi and Oliver Harman explore this intricate landscape and provide a valuable guide for regional policymakers in their aptly titled book, Harnessing Global Value Chains for Regional Development: How to Upgrade through Regional Policy, FDI, and Trade.

This book delves deep into the importance of the export-led processes of development, especially for lagging regions across the globe. Income disparities among regions are primarily influenced by disparities in exports. While both intensive and extensive margin of export diversification play key roles, the inability of regions to diversify into new exports is a particular hindrance. The authors articulate a compelling argument for both developing and developed economies to pivot towards export-led growth through integration into global value chains (GVCs). Foreign direct investment (FDI) and the importance of multinational enterprises (MNEs) are a recurring theme throughout for subnational development.

Not only has this book centred the focus of policymakers onto exports, but also they have keenly pointed out the international structure of global production, and how subnational regions can fit in. Complex production has become an international affair. The more complex and sophisticated an export is, the more intermediate imports are sourced from all over the globe. This complex production cannot be captured by a single country, giving subnational regions ample opportunity to join these GVCs. Ultimately, locales which tend to export more intricate products are seamlessly integrated into GVCs, and thus richer as a result. The authors rightly focus on how to support regions to fit into global production and contribute sophisticated inputs.

The emphasis on economic openness and regional engagement with global production is a key highlight, and one that offers immediate benefit to regional policymakers in broadening their perspective. The benefits of free trade agreements (FTAs), both inward and outward FDI, MNEs, and imbibing productive knowledge from abroad cannot be overstated and are rightfully identified by the authors as key towards enhancing one’s export position. Moreover, the significance of both importing and exporting intermediate products (as opposed to final goods) is underscored. Regarding FDI, Crescenzi and Harman rightly note: ‘FDI can bring new technologies, managerial practices, and marketing strategies that can improve the quality and variety of goods and services, and increase the efficiency and effectiveness of production processes.’ This aptly captures the essence of FDI’s role in infusing an economy with the productive knowledge – or knowhow – that forms the basis for what we at the Harvard Growth Lab refer to as economic complexity.

Crescenzi and Harman shed light on not just the importance but also the process of export diversification, drawing a clear distinction between horizontal leaps (existing tasks in new but complementary GVCs) and vertical leaps (new tasks along existing GVCs). The discussion on vertical leaps demonstrates how a country’s role in a GVC can and should go beyond assembly and into higher value-add sections of the value chain. As the authors note: ‘vertical policies that promote upgrading and innovation, such as through investment in R&D, technology transfer, and skills development, are crucial for enhancing the competitiveness and sustainability of firms and regions’. Participation in an existent GVC can be widened to capture a larger tranche of global production.

Similarly, the authors flesh out how to make horizontal leaps into new GVCs. The authors note how horizontal leaps tend to happen in industries which are related to the existing productive structure of a place. Horizontal leaps are not random, nor should they always target the ‘hot’ industries such as technology and ICT. Leaps into new export industries – critical for continued economic growth – should target GVCs that match existing capabilities and regional advantages. Here, the previous highlight on economic openness remains most relevant. FDI and MNEs play an invaluable role in bringing in new knowhow to an economy which allows a region to export new products and make these key horizontal leaps.

One of the standout sections is the focus on green GVCs (GGVCs). In a world veering towards decarbonisation, the potential for diversification is high. The authors quickly home in on the burgeoning significance of green industrial parks (GIPs) in determining future manufacturing competitiveness. Entrance into GGVCs is not a given, and the book points out that the success of GIPs depends on a range of factors, such as the availability of green technologies and services, the level of stakeholder engagement and participation, the quality of infrastructure and services, the regulatory and policy framework, and the capacity of local institutions and actors to manage and monitor the park. While Crescenzi and Harman adeptly note the importance of GGVCs, one feels the diverse economic potential of GGVCs are underexplored. GGVCs are pivotal for decarbonisation of the developed world, which emits most of the carbon. Developing countries, on the other hand, have very low carbon emissions per capita. The focus for developing country entrance into GGVCs should be less on local mitigation and more on how they can contribute to lowering global emissions by supplying the means of decarbonisation.

As noted by the authors, GIPs hold a unique importance. As the world demands products to be made from green energy (see the European Union’s Carbon Border Adjustment Mechanism), GVCs will relocate to areas in which renewable energy is cheap and plentiful. As it stands, the Global South holds a distinct natural advantage regarding renewal energy production (solar, wind, hydropower), so long as such potential can be harnessed and linked to GIPs. In short, because clean energy is better consumed close to its source, energy intensive industries will have to relocate to renewable energy endowed places (which happen to be poor). The dynamics of how to link access to renewable energy with the relocation of energy-intensive manufacturing will be critical for regional policymakers.

Further, global decarbonisation represents a wide opportunity for the developing world regarding the production of the enablers of decarbonisation. Such items – including component parts for turbines, solar panels and certain battery types – will be in rising demand throughout the process of global decarbonisation. An explicit targeting of entrance into these GVCs is strategically important to enable the rich to decarbonise and the poor to grow. This represents an opportunity in which the authors may wish to follow-up.

In conclusion, Harnessing Global Value Chains for Regional Development is a must-read for policymakers, researchers and anyone keen on understanding the dynamics of modern economic development, especially as they relate to global economic production. Crescenzi and Harman have crafted an important work that bridges theory with actionable insights, offering a roadmap for regions keen on leveraging GVCs for sustainable growth.

On the Design of Effective Sanctions: The Case of Bans on Exports to Russia

We build on Baqaee and Farhi (2019, 2021) and derive a theoretically-grounded criterion that allows targeting bans on exports to a sanctioned country at the level of ∼5000 6-digit HS products. The criterion implies that the costs to the sanctioned country are highly convex in the market share of the sanctioning parties. Hence, there are large benefits from coordinating export bans among a broad coalition of countries. Applying our results to Russia reveals that sanctions imposed by the EU and the US in response to Russia’s invasion of Ukraine are not systematically related to our arguments once we condition on Russia’s total imports of a product from participating countries. We discuss drivers of these differences, and then provide a quantitative evaluation of the export bans to show that (i) they are very effective with the welfare loss typically ∼100 times larger for Russia than for the sanctioners; (ii) improved coordination of the sanctions and targeting sanctions based on our criterion allows to increase the costs to Russia by about 80% with little to no extra cost to the sanctioners; and (iii) there is scope for increasing the cost to Russia further by expanding the set of sanctioned products.

Crime, Inequality and Subsidized Housing: Evidence from South Africa

We study the relationship between housing inequality and crime in South Africa. We create a novel panel dataset combining information on crime at the police station level with census data. Our analysis shows that housing inequality explains a significant share of the variation in both property and violent crimes, net of spillover effects, time and district fixed effects. An increase of roughly one standard deviation in housing inequality explains 10–12 percent of total crime increases. Additionally, we analyze a prominent housing program for low-income South Africans to show that policies that decrease inequality in housing conditions may also reduce crime. We suggest that these policies can help mitigate the societal and individual strains that are often correlated with criminal engagement.

COVID-19 and emerging markets: A SIR model, demand shocks and capital flows

We quantify the macroeconomic effects of COVID-19 for a small open economy. We use a two-country framework combined with a sectoral SIR model to estimate the effects of collapses in foreign demand and supply. The small open economy (country one) suffers from domestic demand and supply shocks due to its own pandemic. In addition, there are external shocks coming from the rest of the world (country two). Aggregate exports of the small open economy decline when foreign demand goes down, and aggregate imports suffer from lockdowns in the rest of the world. We calibrate the model to Turkey. Our results show that the optimal policy, which yields the lowest output loss and saves the maximum number of lives, for the small open economy, is an early and globally coordinated full lockdown of 39 days.

Mental health concerns precede quits: shifts in the work discourse during the Covid-19 pandemic and great resignation

To study the causes of the 2021 Great Resignation, we use text analysis and investigate the changes in work- and quit-related posts between 2018 and 2021 on Reddit. We find that the Reddit discourse evolution resembles the dynamics of the U.S. quit and layoff rates. Furthermore, when the COVID-19 pandemic started, conversations related to working from home, switching jobs, work-related distress, and mental health increased, while discussions on commuting or moving for a job decreased. We distinguish between general work-related and specific quit-related discourse changes using a difference-in-differences method. Our main finding is that mental health and work-related distress topics disproportionally increased among quit-related posts since the onset of the pandemic, likely contributing to the quits of the Great Resignation. Along with better labor market conditions, some relief came beginning-to-mid-2021 when these concerns decreased. Our study underscores the importance of having access to data from online forums, such as Reddit, to study emerging economic phenomena in real time, providing a valuable supplement to traditional labor market surveys and administrative data.

Media release: What can we learn from the Great Resignation?

The impact of return migration on employment and wages in Mexican cities

How does return migration from the US to Mexico affect local workers? Return migrants increase the local labor supply, potentially hurting local workers. However, having been exposed to a more advanced U.S. economy, they may also carry human capital that benefits non-migrants. Using an instrument based on involuntary return migration, we find that, whereas workers who share returnees’ occupations experience a fall in wages, workers in other occupations see their wages rise. These effects are, however, transitory and restricted to the city-industry receiving the returnees. In contrast, returnees permanently alter a city’s long-run industrial composition, by raising employment levels in the local industries that hire them.

Innovation on Wings: Nonstop Flights and Firm Innovation in the Global Context

We study whether, when, and how better connectivity through nonstop flights leads to positive innovation outcomes for firms in the global context. Using unique data of all flights emanating from 5,015 airports around the globe from 2005 to 2015 and exploiting a regression discontinuity framework, we report that a 10% increase in nonstop flights between two locations leads to a 3.4% increase in citations and a 1.4% increase in the production of collaborative patents between those locations. This effect is driven primarily by firms as opposed to academic institutions. We further study the characteristics of firms and firm locations that are salient to the relation between nonstop flights and innovation outcomes across countries. Using a gravity model, we posit and find that the positive effect of nonstop flights on innovation is stronger for firms and subsidiaries with greater innovation mass (e.g., stocks of inventors and R&D spending), located in innovation hubs or countries that are deemed technology leaders, and that are separated by large cultural or temporal distance.

Research Summary: The Role of Nonstop Flights in Fostering Global Firm Innovation

Birthplace diversity and economic complexity: Cross-country evidence

We empirically investigate the relationship between a country’s economic complexity and the diversity in the birthplaces of its immigrants. Our cross-country analysis suggests that countries with higher birthplace diversity by one standard deviation are more economically complex by 0.1 to 0.18 standard deviations above the mean. This holds particularly for diversity among highly educated migrants and for countries at intermediate levels of economic complexity. We address endogeneity concerns by instrumenting diversity through predicted stocks from a pseudo-gravity model as well as from a standard shift-share approach. Finally, we provide evidence suggesting that birthplace diversity boosts economic complexity by increasing the diversification of the host country’s export basket.

What Can the Millions of Random Treatments in Nonexperimental Data Reveal About Causes?

We propose a new method to estimate causal effects from nonexperimental data. Each pair of sample units is first associated with a stochastic ‘treatment’—differences in factors between units—and an effect—a resultant outcome difference. It is then proposed that all pairs can be combined to provide more accurate estimates of causal effects in nonexperimental data, provided a statistical model relating combinatorial properties of treatments to the accuracy and unbiasedness of their effects. The article introduces one such model and a Bayesian approach to combine the O(n2) pairwise observations typically available in nonexperimental data. This also leads to an interpretation of nonexperimental datasets as incomplete, or noisy, versions of ideal factorial experimental designs. This approach to causal effect estimation has several advantages: (1) it expands the number of observations, converting thousands of individuals into millions of observational treatments; (2) starting with treatments closest to the experimental ideal, it identifies noncausal variables that can be ignored in the future, making estimation easier in each subsequent iteration while departing minimally from experiment-like conditions; (3) it recovers individual causal effects in heterogeneous populations. We evaluate the method in simulations and the National Supported Work (NSW) program, an intensively studied program whose effects are known from randomized field experiments. We demonstrate that the proposed approach recovers causal effects in common NSW samples, as well as in arbitrary subpopulations and an order-of-magnitude larger supersample with the entire national program data, outperforming Statistical, Econometrics and Machine Learning estimators in all cases. As a tool, the approach also allows researchers to represent and visualize possible causes, and heterogeneous subpopulations, in their samples.

Yet it Endures: The Persistence of Original Sin

Notwithstanding announcements of progress, “international original sin” (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.