Moving Up the Value Chain

Moving Up the Value Chain
This is one of the most used and least defined phrases in discussions of business strategy and sometimes national policy also. It has been used to describe improving profitability, improving productivity, better marketing, innovation and a lot of other things. Moving up the value chain is always assumed to be a good thing. The “chain” itself is never described, nor is the process by which one is to move up it, or what will happen if everyone does this. The chain is apparently static, a kind of ladder on which one may climb from link to link, provided one has the right consultants and follows their advice.
This is not to say that value chains aren’t important. Global Value Chains (GVCs) are a big policy focus in industrial policy, and a subject of considerable analysis. But the terminology might need to be revised. Why a chain, anyway? As I have said elsewhere, the use of the word “chain” suggests something linear and also something fairly sturdy and difficult to break.
Such an image is not really helpful in trying to understand global production systems. In practice these often involve parallel sections, where there are multiple sources and destinations. Production location will often be determined by the need to be near supplies or near consumers, so duplicate plants will be needed. And the need to ensure continuous availability of inputs will often require supplies to be drawn from more than one source.
Earlier this year I had an interesting discussion with the Statistical Division of the United Nations. Apart from the huge range of activities they have in the established fields of data such as commodity trade, national accounts and so on, they are now taking an additional approach in order better to understand GVCs, selecting one sector and exploring it in depth, breaking it down by ownership and identifying business functions to see the impact of particular processing stages.
It’s great that this is being done at an international level. Firstly it complements the multisector work continuing in the OECD on so-called “trade in value added”. Secondly, by carrying it out at the UN Statistical Division, a body with huge experience in trade and industry data, the work can be contextualised more readily and can draw on co-operation from governments worldwide. Because of the reach and the impact of GVCs they are of strong policy interest, not just to individual governments in particular cases, but also to all concerned with the stability and future of the world economy.

Competitiveness Liga

People like numbers, as long as there are not too many. And people have a broad grasp of rankings: they know the difference between coming first in a race and coming last. From this comes some of the appeal of competitiveness rankings. I understand this appeal: I worked myself in that area for many years, supporting the National Competitiveness Council in Ireland, and also involved in policy benchmarking at EU level and being part of an international competitiveness network. However, in our NCC reports we resisted the temptation to have an aggregate ranking, because we felt that it would conceal more information than it revealed.
Nevertheless, competitiveness rankings are well established. The two big ones, the IMD and the World Economic Forum rankings, are widely quoted and governments and businesses appear to take them seriously enough. Both reports work in the same basic way, gathering indicators of what are believed to be the factors of competitiveness and putting them together in composite sub-rankings which are then combined into a single ranking for those who want an overview. The key results are here:

RankIMD 2017IMD 2018WEF 2017-2018
1Hong Kong USASwitzerland
2SwitzerlandHong Kong SARUSA
3SingaporeSingaporeSingapore
4USANetherlandsNetherlands
5NetherlandsSwitzerlandGermany
6IrelandDenmarkHong Kong SAR
7Denmark UAE Sweden
8Luxembourg Norway UK
9Sweden Sweden Japan
10UAE Canada Finland

 

Clearly there are similarities, but also surprises.  For IMD,  the United Arab Emirates ranks seventh in the world, and, unlike WEF, IMD finds no places in the top ten for large advanced economies such as Germany, the UK and Japan.

The IMD 2018 Report came out in May 2018 and the website gives the rankings for 2017 and rankings and scores for both 2017 and 2018. By scores is meant a composite index prepared in order to provide a ranking. A quick look at these shows three things
1. First of all the top ten doesn’t change very much. As in a football league, two drop out (Ireland and Luxembourg) and two are promoted (Norway and Canada).
2. If we look at all 43 countries covered by IMD, we find that the most competitive countries are most similar. The top ten are closer to each other than lower groups are.
3. These single rankings actually don’t tell us very much: the underlying data is probably far more interesting.

The euro, again

Paul Krugman had a strange piece in the New York Times yesterday. He said that many of Europe’s problems came from the “…disastrous decision, a generation ago, to adopt a single currency. …. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression.”

There are a lot of things wrong with this kind of thinking, and Krugman is not the first to come up with it. Many US and UK economists think the euro is a bad idea. But to point to Iceland, without ever considering the very specialised nature of its economy and resource endowment, makes little sense. And to talk about exchange rates as the key to competitiveness, without ever mentioning taxation, or skills, or education, or regulation, or infrastructure, or science and technology policy, or telecommunications, or connectivity, or language, or legal systems, or any other factor, is very odd.

Italy and the euro

The formation of a new populist government in Italy is getting a certain amount of attention from commentators. The Süddeutsche Zeitung outlines growing worries in Brussels and Bonn that the new government will threaten the stability of the EU through questioning its fiscal rules and in particular may hinder further eurozone reforms. The Neue Züricher Zeitung highlights nervousness among Italy’s creditors and the uncertainty over how much confrontation there will be between the new government and Brussels . Le Monde concentrates on the personalities and backgrounds of the two party leaders concerned, but the Wall Street Journal gives it little coverage, saying “European stocks climb as Italy tensions ease for now”. In the UK, the Telegraph has an article headed “As Italy has shown, the euro is a far bigger threat to Europe than Brexit” from a former Conservative party leader and foreign minister. The Financial Times focuses on the potential prime minister of Italy and the constitutional constraints on radical change.
What will happen? Hard to say exactly, but the most unlikely thing of all is for Italy to leave the euro. First of all, Italians, having had the euro, will not want to move to a currency nominally at least under the control of domestic politicians. Secondly, Italy is not in the G-7 by accident: it has a huge range of sophisticated businesses who are well able to see that the costs of leaving would be enormous and well outweigh any benefits.