What happens in global value chains when the final market shifts from the North to the South? Masuma Farooki, Raphael Kaplinsky, Anne Terheggen and Julia Tijaja Development Policy and Practice, The Open University Freeman Centre, 12 th March 2010

Production Design Marketing Services The increasing globalisation of VCs Competitive pressures

The 2 nd Industrial Divide – from Fordism to post-Fordism From supply-push to demand pull Critical success factor in supply-push –Price –Volume –Price Critical success factor in demand pull –Quality –Differentiation –Price

The centrality of standards in Global Value Chains Private sector standards – QCD –Quality – as in parts per million –Cost – price reductions by suppliers –Delivery – more frequent, smaller and on-time deliveries Govt standards –Health and safety in work –Product safety Civil society –Labour standards –Organic standards

Shifting Centres of Production and Consumption Why Are Markets Shifting from the North to the South?

Structural Weakness in the North Production: Maturing Economies (Services Dominated) Imports ↑ from the South Consumption: Rising HH Debt to Savings/Income Ratio Un-sustainable Consumption Large Trade Deficits Financial Crisis 2008 brings on a period of sharp refocus Export more Consume less

Sustained Consumption in the South Production: Resource-Intensive Economies ( across all commodities ) Manufactures led trade Employment levels rising Consumption: Historical high Saving rate Consumption levels rising Financial Crisis 2008 brings about a period of ‘stimulus’ packages to maintain/support growth Support domestic consumption Support domestic infrastructure

Economy vs. Economy Country Unemployment Rate* Industrial Production** Germany US China*** % Source: * IMF World Economic Outlook (January 2010) ** OECD Statistics *** Other sources

Economy vs. Economy Country Current Account Balance (% of GDP) General Government Balance (% of GDP) Germany US China* Source: IMF World Economic Outlook (January 2010) Shaded area estimates * Other source

Household Consumption Source: Total UK Personal Debt (£bn) Total Secured Lending Total Other Consumer Credit Lending Total Credit Card Lending

Consumption in the South Base Metals ( % Share of World Demand) 1 Aluminium51333 Lead71031 Iron Ore41648 Copper71226 Food Products (% Share of World Consumption) 2 Poultry91817 Pork Beef21012 Soybeans 40 China’s Share of Global Consumption of Base Metals & Meat Source: 1 Macquarie Commodities Research (2008) 2: Source: Conceicao and Mendoza (2008)

Projected Global Growth Source: IMF World Economic Outlook (January 2010)

Source of Future Growth % Change World Output Advanced Economies Developing Asia United States China India Source: IMF World Economic Outlook (January 2010) Shaded area is projections

Source of Future Growth World Trade Volume (goods and services) Imports (% change) Advanced Economies Emerging & Developing Economies Exports (% change) Advanced Economies Emerging & Developing Economies Source: IMF World Economic Outlook (January 2010) Shaded area is projections

China’s and India are not unique..

Households according to disposable income bracket in BRIC countries: 2002/2007 '000 households

Distinctive Features of Low Income Markets Demand is commodity-intensive

Distinctive Features of Low Income Markets Demand is commodity-intensive Price Price and affordability Standards not important –Undifferentiated products and low firm standards –Few state concerns with health and safety –Weak civil society Import of relatively unprocessed products –similarity of labour endowments –insensitivity to environmental issues

Cassava in Thailand Cassava the poor men’s crop 4 th more important source of starch. Staple, food security Bulky and perishable Traded in processed form: intermediate products

starch waste clean chips starch waste dried native starch or starch slurry normal chips starch waste normal chips via exporters roots Drying yards - Chips Pellet plants Modified starch factories Native starch factories Farmers Export (feed) EU, etc Domestic (feed) Non food industry domestic / export Food industry domestic / export Export (ethanol) China Starch derivatives domestic / export

Cassava in Thailand Cassava the poor men’s crop 4 th more important source of starch, staple, food security Bulky and perishable Traded in processed form: intermediate products Thailand third largest producer Thailand the largest global exporter Unique in Thailand as predominantly industrial crop

Thailand’s Share in World Cassava Exports,

Thai Dried Cassava: The shift in Export Destination

Thai Cassava Export Composition

Thai Cassava Export: China vs. Japan

Thai Starch Export Composition to China

starch waste clean chips starch waste dried native starch or starch slurry normal chips starch waste normal chips via exporters roots Drying yards - Chips Pellet plants Modified starch factories Native starch factories Farmers Export (feed) EU, etc Domestic (feed) Non food industry domestic / export Food industry domestic / export Export (ethanol) China Starch derivatives domestic / export

Concluding on Thai cassava sector Two families of products – dried cassava and starch Each family has higher value sub-products Market shifts from EU to China for dried cassava China wants chips not pellets Standards: EU HACCP & GMP China high starch content But because of different industries

Concluding on Thai cassava sector China’s starch demand growing More native starch Standards: based on industries China price sensitive Speculations: level of market sophistication?

Timber in Gabon Oil Under-populated and labour shortage Corruption Untapped minerals Timber (tropical wood) – 13 th largest producer – 3 rd largest exporter (16% market share)

Timber Value Chain in Gabon

Furniture Veneer Plywood0.2 Fibreboard China’s Growing Share of Exports in Timber Processing Industries (percent) Source: compiled from UN Comtrade accessed December 2009

China’s Imports of Logs and Wood Products (1,000 m 3 ) Source: compiled from FAO ForesSTAT accessed December 2009

Logs and Wood Product Demand Distribution for China and the EU-15 ( ; 1,000 m 3 ) Source: compiled from FAO ForesSTAT accessed December 2009

Chinese and EU buyers’ CSFs - Logs (1=not important, 5=very important)

Chinese and EU buyers’ requirements – International Regulation and Standards (1=not important, 5=very important)

Strong endowment of scarce resource (esp. Okoumé) Growth of value adding production (sawnwood, veneer and plywood) due to GA legislation and EU demand China becomes the dominant global importer with growing domestic processing capacities China only wants unprocessed logs Standards? –Growing importance in EU (both state and civil society) –Chinese buyers uninterested Complex developmental impacts Concluding on Gabon’s Timber Sector

Some questions How generalisable across sectors? Is this a moving frontier – –Northern markets will reappear? –China becomes a quasi-northern market? What about India and other emerging economies? Distributional implications? Static or dynamic comparative advantage? South-South – win-win or win-loose….?