CAPTURING THE GAINS

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CAPTURINGTHEGAINSSummit Briefing – December 2012economic and social upgradingSummit Briefings aim toinform panel discussionsand stimulate debate at theCapturing the Gains GlobalSummit, ‘Capturing theGains in Value Chains’, held inCape Town, South Africa, 3-5December 2012.Economic and socialupgrading in global valuechains: emerging trendsand pressuresStephanie Barrientos, Gary Gereffiand Dev NathanAbstractThe global value chain (GVC) terrain is shifting, with the expansion of regional anddomestic chains in Africa, Asia and Latin America. However, expansion is in highvolume, low-price markets, where competition must be balanced against risingcosts and higher quality demands. Many sectors face shortages of the skills neededto sustain economic upgrading. Meanwhile, social upgrading does not necessarilyfollow economic upgrading, with irregular workers (often women) and small-scaleproducers often experiencing poor remuneration and conditions. Joint action amongcompanies, civil society, governments and donors is needed to link economic andsocial upgrading and promote more inclusive development within GVCs.Keywordsglobal value chains, economic upgrading, social upgrading, leverage, joint actionThe findings and views presented here donot represent those of Capturing the Gainsfunders or supporting organisations.AuthorsStephanie Barrientos is Associate Director of the Brooks World Poverty Instituteand Senior Lecturer in Global Development with the Institute for DevelopmentPolicy and Management, University of Manchester, UK.Email: s.barrientos@manchester.ac.ukGary Gereffi is Professor of Sociology and Director of the Center on Globalization,Governance & Competitiveness at Duke University, US.Email: ggere@soc.duke.edu Karen Robinson/Panos Pictures (2003)Dev Nathan is Professor at the Institute for Human Development, New Delhi,India, and Visiting Fellow, Duke University, US.Email: nathandev@hotmail.com

Capturing the Gains Summit Briefing: Economic and social upgrading in global value chains – emerging trends and pressures“.what is new is thegrowing prominenceof regional anddomestic chains.”Shifting terrain of globalvalue chainsGlobal value chains (GVCs) are anincreasingly important dimension oftrade, production and employment.Lead firms coordinate design,production, distribution and retail acrossborders; what is new is the growingprominence of regional and domesticchains within Africa, Asia and LatinAmerica. These now involve a market ofabout 12 trillion, or 36 percent of globalgross domestic product in 2012, up from10 percent in 1980.1 Accessing higherincome consumers remains important,but expansion is faster in high-volume,low-price market segments.Economic and socialupgrading and downgradingNotes1. Atsmon, Y., Child, P., Dobbs, R. andNarasimhan, L. (2012). Winning the 30Trillion Decathlon: Going for Gold inEmerging Markets. London: McKinsey andCompany.2.Reported in Bernhardt, T. and Milberg, W.(2012) International trade and the relationbetween economic and social upgrading.Capturing the Gains Summit Briefing.3.See www.capturingthegains.org4. See Barrientos, S., Gereffi. G. and Rossi, A.(2011). ‘Economic and social upgrading inglobal production networks – challengesand opportunities’. International LabourReview 150(3-4), 319-340.www.capturingthegains.orgCapturing the Gains research askedwhat opportunities and challengesthere were for promoting economic andsocial upgrading within GVCs to benefitworkers and small-scale producers. Thiscombined macro trade-level analysis2with meso-level value chain studies inapparel, horticulture, mobile phonesand tourism.3Economic upgrading is defined as themovement of suppliers up the valuechain, where they undertake highervalue activities. Social upgrading is theprovision of better jobs and rights forworkers and small-scale producers. 4In general, economic upgradingprecedes, but does not necessarily leadto, social upgrading; in some conditions,this upgrading movement may bereversed. Regional and domestic valuechains provide new opportunitiesfor better jobs and remuneration,which means workers and small-scaleproducers can provide sustained supportto low-income households. Economicand social upgrading in value chainsis thus essential to more inclusivedevelopment.Major factors conditioning the likelihoodthat economic and social upgrading willoccur together are as follows:Contract manufacturers and suppliers,who control major supply functionsin Africa, Asia and Latin America, havedeveloped their own business strategiesfor economic upgrading within valuechains. These are becoming leadingvalue chain actors.Reverse innovation has occurred:emerging economy firms developproducts to suit low-value high-volumemarkets, such as inexpensive mobilephones and locally designed apparel.These are fuelling South–South tradeand finding their way into somedeveloped economies.Domestic retailers are adaptingcentralized distribution to diverse localprocurement and consumer contexts.Global retailers are expanding throughacquisitions within regional markets.Quality, price and volume act asbarriers to entry, or create downgradingpressures on uncompetitive or smallerfirms. They matter in regional value2

Capturing the Gains Summit Briefing: Economic and social upgrading in global value chains – emerging trends and pressures“.women’s sociallyacquired skills arecritical to quality butoften unrecognized.chains, but different standards apply,opening potential opportunities forproducers able to attain requisitecapabilities.Supplier margins are squeezed byrising input costs, price pressures andrising quality standards, with differentrequirements across value chains.Tightening supplier margins generatesdifferent outcomes, including workloadintensification for the existing labourforce (e.g. mobile phones) or intensifieduse of irregular/casual labour(particularly horticulture and apparel).Quality standards are driving the needfor more educated and skilled (oftenregular) labourers. This creates pressurefor better remuneration and conditions.Reverse upgrading is where socialupgrading pushes economic upgrading.Increased wages and a decline in netmargins forced Indian IT majors to lookfor ways of economically upgradingtheir businesses.‘Feminization’ in labour-intensivesegments: women’s socially acquiredskills are critical to quality, but oftenunrecognized. Women are concentratedin irregular work with lowerremuneration and rights or as unpaidfamily labour in small-scale production.Productivity and worker remuneration:increased productivity can be anenabling condition for improvedworkers’ remuneration and rights.But this is not inevitable; it dependson the level of organization and localinstitutional factors.3”When does joint upgradinghappen?Value chain analysis examines linkagesbetween commercial firms, workers andsmall-scale producers, as well as theirwider social and institutional settings.External actors can also affect economicand social upgrading.The following are examples fromCapturing the Gains GVC studies:Cocoa–chocolate5Over recent decades, the cocoa–chocolate value chain has undergoneconcentration in processing andmanufacturing. Cocoa farmers havereceived limited support, often havelow yields and are poorly remunerated.Media attention has highlighted issuesof child labour, and many youngerinnovative farmers are leaving thesector for better options elsewhere.Consumption of chocolate has grownsteadily, especially in emergingeconomies, with predictions of futurecocoa shortages. Leading chocolatemanufacturers are working with civilsociety, donors and governments tosupport farmers and their communities.Social upgrading is now recognized ascritical to economic upgrading – andensuring the future resilience of thecocoa–chocolate value chain.Wage increases in Bangladesh6Bangladesh is one of the lowest-costgarment producers in the world.Garment manufacturing in the countryhas certainly not taken the ‘high road’,Notes5.See Barrientos, S. (2012). ‘Beyond FairTrade: rising corporate concern oversocio-economic base of cocoa–chocolateglobal production networks’. InternationalFairtrade Symposium, Liverpool, 2-4 April.6. See Ahmed, N. (2012). Economic and socialupgrading in the ready-made garmentsector of Bangladesh: some experiences ofminimum wage legislation. Capturing theGains Working Paper (forthcoming).www.capturingthegains.org

Capturing the Gains Summit Briefing: Economic and social upgrading in global value chains – emerging trends and pressures“Where collectivebargaining agreementshave been instituted,conditions generallyimprove.”but over the past few years it hastaken a slightly ‘better road’. Increasedproductivity has led to not only higherwages, but also improved overall workingconditions for Bangladeshi garmentworkers. This outcome has required aseries of workers’ struggles, pressurefrom buyers and then government actionto increase minimum wage rates. Theimportant lessons from Bangladesh arethat, even at the bottom of the valuechain, there is scope for improvementsin working conditions, but worker actionis often required to turn potential intoactual gains.Apple smart phones7Notes7. See Mayer, F.W. (2012). ‘Beyond the “businesscase”: what the Apple-Foxconn casedemonstrates about the interaction amongcorporate self-governance, civil society, andthe re-emerging state’. International StudiesAssociation 53rd Annual Convention, SanDiego, CA, 1-4 April.8.See Christian, M. and Nathan, D. (2012).Tourism overview: changing end marketsand hyper-competition. Capturing the GainsWorking Paper (forthcoming).www.capturingthegains.orgDespite several exposés about poorworking conditions in its Chinaassembly operations, Apple made noeffort to intervene in the operations ofFoxconn, the electronics manufacturerthat assembles all Apple productsin the country. In early 2012, thingsbegan to change. Apple and Foxconnopenly admitted to factory problems,and introduced major changes inworking conditions and wages. Foxconnannounced significant wage increasesand conducted an audit of workingconditions.Social upgrading occurred as a resultof a number of factors: Apple wasmotivated by pressure from civil societyactivists to protect its reputationamong international consumers; theChinese government strengthened itslabour laws, backed this up with realenforcement and decreed substantialincreases in the minimum wage; andworkers themselves felt empoweredto demand better conditions andcompensation.Joint action in tourism in China8Localization of tourism in Lijiang, China,resulted in increased employment andpoverty reduction; but a high level ofcompetition among suppliers, combinedwith oligopolistic buyers, threatenedto reduce prices. The local governmenttook the initiative to maintain Lijiangas a premier tourist destination, so itcould command a price premium. Moreimportantly, suppliers, including hotels/guesthouses and village suppliers ofexcursion services, combined at theirown levels to reduce competition andsupport prices and incomes.An overall finding is that enablingrights (freedom of association and nodiscrimination) are more difficult toachieve than ‘measurable standards’on pay and conditions. Where collectivebargaining agreements have beeninstituted, conditions generally improve(e.g. Kenyan and Ugandan flowers).Small-scale producers are better ableto access value chains when theyare organized (e.g. in horticulturemost private standards require groupcertification and buyers source in volume).4

Capturing the Gains Summit Briefing: Economic and social upgrading in global value chains – emerging trends and pressuresCapturing the Gains bringstogether an internationalresearch network to examineeconomic and social upgradingin business communities acrossthe developing world.Key recommendationsFor economic and social upgrading to go in tandem, identifying commercialleverage points and forming alliances between commercial, civil societyand government actors appear critical. We recommend key value chaininterventions: Improve buyer/supplier relationships to reward quality and standards. Factor a living wage into value chain pricing. Ensure producer marginsare sufficient to cover this and benefits are transferred to workers.The programme explores theconnections between businesscompetitiveness and socialprosperity with attention tofirm innovation, trade expansion,labour standards and decentwork.Its research allows policy-makersand business leaders to betterunderstand the relationshipbetween business growthand poverty reduction in theglobal South. Enhance training and reward skills (including of female workers). Enhance organization of small-scale producers and independent unionrepresentation of all workers (regular and irregular). Link civil society initiatives (such as ethical and fair trade) with widergovernment and donor interventions. Ensure government and donor policies support value chain upgradingby producers and lead firms within developing economies. Support training and education of youth, workers and small-scaleproducers that link technical skills, social or ‘soft’ skills and workers’ rights. Implement core International Labour Organization Conventions andlabour legislation through better resourced labour inspectorates. As an indirect action, ensure comprehensive social protection forvulnerable irregular workers and small-scale producers.Following the Capturing theGains summit, a revised versionof this paper will be madeavailable on the Capturingthe Gains website in 2013.5www.capturingthegains.org

Capturing the Gains Global Summit, ‘Capturing the Gains in Value Chains’, held in Cape Town, South Africa, 3-5 December 2012. The findings and views presented here do not represent those of Capturing the Gains funders or supporting organisations. Economic and social upgrading in global value chains: emerging trends and pressures

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