VoxEU Column Global crisis

Challenges in the coming phase of globalisation: A sense of déjà vu

Economic integration transmitted the negative shocks of the crisis to workers across the world. As the global economic recovery begins, this column says that there is no cause for complacency or celebration. It warns that unemployment rates are expected to remain high in many countries and recommends designing government policies so that more may share in the gains from globalisation.

The global crisis has hit workers hard. The ILO (2010) estimates that unemployment increased by more than 30 million in 2009 to 212 million jobless. While openness can contribute to growth and helps to buffer domestic shocks, it also increases exposure to external shocks.

A recent ILO publication (Jansen and von Uexkull 2010) provides insights into the extent and the nature of the negative consequences for workers and households from the crisis-related trade and investment shocks. The impacts differ significantly across countries, depending on levels of openness and export structure and policy responses. In some cases, labour market adjustments during the crisis manifested themselves mainly in terms of reductions in wages or hours worked. In other cases, significant contractions in the quantity of employment have been observed. Wage reductions and increases in wage arrears have been a frequent phenomenon since 2008, with many countries experiencing increases in vulnerable forms of employment.

The recent global crisis has generated additional evidence that wages bear the brunt of adjustment to external shocks. Based on a sample of 41 middle-income developing countries, Khanna et al. (2010) conclude that the impact of the economic downturn during 2008-2009 fell disproportionately on the quality of employment rather than on the number of jobs. Slower growth in earnings accounts for nearly three quarters of the total adjustment for the average country, driven by a reduction in working hours, as well as a shift away from the better-paid industrial sector and toward informal or rural employment.

Despite significant heterogeneity, some general conclusions can be drawn regarding the employment effects of the trade shock (Jansen and von Uexkull 2010). First, the effects were significant in many countries, and particularly severe in countries with exports concentrated in the sectors that experienced the largest drop in trade – such as iron and steel and durable products.

Second, the employment effects of the trade shocks rapidly spread to other parts of the economy. This occurred through two channels: reduced demand for inputs by exporting companies and a general reduction in demand because of reduced household incomes. Estimates show that up to half of the employment effects of the trade collapse may be the result of such income-induced effects (Kucera et al. 2010).

Third, volatility in global markets is likely to have long-term negative growth effects on economies because of its effect on investment decisions by companies and households (World Bank 2010, Jansen and von Uexkull 2010). There is, for instance, evidence that fluctuations in world markets affect household decisions, like decisions to migrate or to provide education to children.

Effective social protection schemes are critical

This crisis therefore reconfirms that social protection systems have a very important role to play in open economies by acting as an automatic buffer for major shocks. Schemes that target household income, like unemployment benefit schemes or income transfer programmes, can help address both the direct and indirect effects of trade shocks, allowing households to maintain consumption and investment patterns. Social protection schemes should be considered an essential element of a sustainable system of global trade.

This is especially important given the potential importance of an open trading system for developing countries. Recent sectoral analyses conducted by the World Bank reveal that enterprises will want to continue to rely on the free flow of goods and services in organising their business operations (Cattaneo et al. 2010). Some important shifts in global production and demand have taken place, but the crisis seems to have accelerated rather than reversed pre-existing trends. On the production side, the trend is toward consolidation: new clusters of production are emerging, with tighter links in global value chains. On the demand side, the trend is toward diversification: South-South trade has benefited from the collapse of demand in the North, and emerging markets have become more attractive to domestic and foreign producers, both from the North and the South. The new world emerging from the crisis thus appears to create new opportunities for development from globalisation, along with new challenges.

Shifts in global production and demand

Global producers who refocused their sales strategy on emerging markets such as China and Poland before or even during the crisis have tended to do better than others. Similar shifts are observable in developing countries’ export strategies. South-South trade has been boosted by the crisis, representing up to 50% of global intermediate goods exports in 2009, compared to some 25% in 2000 (Milberg and Winkler 2010). In the apparel sector, China is lessening its dependence on traditional export partners while adding important new markets, such as Russia and countries of the former Soviet bloc (Gereffi and Frederick 2010).

Changes in the pattern of global demand are not only changing firms’ export behaviour but also leading emerging country firms to focus more on their domestic markets. This is illustrated by the mobile phone sector in China (Sturgeon and Kawakami 2010). The share of imports in total sales in China dropped from 47% to 14% between 1988 and 2005, while handset sales have grown from 3.4 million units in 1998 to 109 million units in 2003. The lack of variety in the lower-end product lines, higher prices, incompatible standards, and some restrictive regulatory requirements explain the shift in demand from foreign to local handsets. The global crisis has accelerated these trends.

The shift in the centre of gravity of global demand and the increasing share of South-South trade create a number of challenges (Kaplinsky and Farooki, 2010). First, consumer preferences in emerging countries are different, requiring a production adjustment. In developing countries, price is a more important consideration; product differentiation (variety and quality) matters less. At the same time, both emerging market firms and consumers are moving up-market. Exporters to these markets therefore need to “commodify” established products by dramatically reducing costs without sacrificing quality.

Second, the importance of product and process standards is significantly lower when the demand comes from developing countries – for both final demand and demand for intermediate products in global value chains. This has significant consequences for developing countries that have invested in complying with higher standards set by developed countries. Also, it could have negative consequences for environmental externalities and other public goods.

Third, consumers in emerging economies like China have a stronger relative preference for less processed products. This could have repercussions for developing countries trying to move up the value chain. Processing at the source has long been the first step in industrial upgrading. By demanding more unprocessed products, a buyer can confine its suppliers to the low-end of the value chain and limit their upgrading path: in other words, the buyer may have the power to kick away the development ladder.

Implications for developing countries

While the shifts in global production patterns have the potential to benefit developing countries, they also generate challenges. The constant competition for foreign investment and contracts with global buyers leaves many developing countries’ suppliers with little leverage in the supply chain. The result is an unequal partition of total value-added along commodity chains in favour of lead firms (Gereffi and Frederick 2010 and Sturgeon and Kawakami 2010).

The consolidation of global value chains and shifts of production to the South will not benefit all developing countries equally. Market size matters and dictates the potential for local industries’ growth. Sturgeon and Van Biesebroeck (2010) provide an example of this virtuous cycle of development in large emerging economies: lead automotive firms invest to tailor final products in very large markets only, such as China and India. This leads them to establish local design, engineering, and regional headquarter facilities, which provide opportunities for local suppliers, and international opportunities can grow from there. In some instances, geographical proximity to large markets in developed countries might also help. Conversely, geographical distance from major markets is a major obstacle to integration in a global economy built around value chains.

Participation in global value chains has increasingly become a prerequisite to trade integration. Even when it comes to South-South trade, the role of global value chains remains predominant: half of all trade in intermediate products takes place between developing countries (Milberg and Winkler 2010). The consolidation of global value chains and the shift towards Southern markets has resulted in better integration of many developing countries (more regional clusters), but further exclusion of those at the periphery of this new global manufacturing web.

Overall, the crisis highlights a set of challenges that are familiar: not all households within a country will benefit equally from globalisation. Not all companies will manage to become part of international supply chains. Not all countries will manage to get from the periphery into the centre of an integrated world and generate new employment opportunities from openness. But carefully designed government policies can help. The design and implementation of such solutions deserve our continuous attention.

This column draws on research supported by the ILO and by the UK-funded Global Trade and Financial Architecture project that was presented at a June 21 conference hosted by the ILO “Globalization and Employment: Global Shocks, Structural Change and Policy Response”. The views expressed are personal and should not be attributed to the World Bank or to the ILO.


Cattaneo, Olivier, Gary Gereffi, and Cornelia Staritz (eds.) (2010), Global Value Chains in a Post-Crisis World, World Bank, forthcoming.

Gereffi, Gary and Stacey Frederick (2010), “The Global Apparel Value Chain, Trade and the Crisis: Challenges and Opportunities for Developing Countries”, World Bank Policy Research Working Paper No. 5281, World Bank.

International Labour Office (2010), Global Employment Trends, Geneva: ILO.

Jansen, Marion and Erik Von Uexkull (2010), Trade and Employment in the Global Crisis, Geneva: ILO and New Delhi: Academic Foundation.

Kaplinsky, Raphael and Massuma Farooki (2010), “What are the Implications for Global Value Chains when Markets Shift from North to South?”, World Bank Policy Research Working Paper No. 5205, World Bank.

Khanna, G, D Newhouse, and P Paci (2010), “Fewer Jobs or Smaller Paychecks? Labour Market Impacts of the Recent Crisis in Middle-Income Countries”, Economic Premise No. 11, World Bank.

Kucera, David, Leanne Roncolato, and Erik von Uexkull (2010, forthcoming), “Trade Contraction in the Post 2007 Crisis: Employment and Inequality Effects in India and South Africa”, Employment Working Paper 54 (Geneva, ILO, Employment Sector).

Milberg, William and Deborah Winkler (2010), “Trade Crisis and Recovery: Restructuring of Global Value Chains”, World Bank Policy Research Working Paper No. 5294, World Bank.

Sturgeon, Timothy and Momoko Kawakami (2010), “Global Value Chains in the Electronics Industry: Was the 2008-09 Crisis a Window of Opportunity for Developing Countries” in Olivier Cattaneo, Gary Gereffi, and Cornelia Staritz (eds.), Global Value Chains in a Post-Crisis World, World Bank, forthcoming.

Sturgeon, Timothy and Johannes Van Biesebroeck (2010), “Effects of the Crisis on the Automobile Industry in Developing Countries: A Global Value Chain Perspective”, World Bank Policy Research Working Paper No. 5330, World Bank.

World Bank (2010), Global Economic Prospects.

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