Future of global value chains is green, top economist says

(MENAFN- Asia Times) Erik Berglof sets the vision and strategy for the Economics Department of the Asian Infrastructure Investment Bank and leads the planning, implementation and supervision of its work plan in support of the bank's mandate. He is the AIIB's inaugural chief economist.

Photo: Courtesy of Erik Berglof

Prior to joining the AIIB in September 2020, Berglof (left) was director of the Institute of Global Affairs, London School of Economics, and chief economist of the European Bank for Reconstruction and Development from 2006 to 2015, where he was part of creating and co-led the Vienna Initiative, a European crisis response team credited with mitigating the impact of the 2008 global financial crisis.

He is an expert in transition economics and institutional transformation through private-sector development.

He holds a PhD in financial economics and a Master of Arts in business and economics, both from the Stockholm School of Economics.

Excerpts of an interview with Berglof, a Swedish national, follow.

Adriel Kasonta: The Covid-19 pandemic has been with us for nearly two years and has managed to affect every sphere of our lives. This certainly also applies to the global economy. Can we argue that global value chains (GVCs) have not been spared by the pandemic impact either?

Erik Berglof: Obviously, when much of the Chinese economy was in lockdown, the GVCs located there were affected, but what was remarkable was how quickly they rebounded as the lockdown was lifted. The current challenges have more come from the fact that economies open up at different times and to different extents.

The resulting disruptions and dislocations have been amplified by the massive demand stimulus and the unwinding of savings. Most of this should be temporary, but the individual issues add up and extend over time so some of the impact could become more permanent.

AK: Was the pandemic the primary reason behind publication of the Asian Infrastructure Investment Bank's recent report titled“Sustaining Global Value Chains”? Can you tell our readers a bit more about the publication?

EB: The World Bank published a very rich report on GVCs in 2019 showing how important they had become for the global economy, but also pointing out that they seemed to have leveled out in importance since the global financial crisis.

We wanted to see what we could learn about these arrangements from the pandemic, but also understand better their impact on economies in Asia. One thing that strikes you immediately when you look at the location of GVC activity is that their relative importance has shifted from advanced to emerging and developing economies.

It is not only about China, but many other economies in the emerging world have made use of the GVCs to join global production. The fact that a country can enter a value chain with just a component, and not necessarily by producing a whole car or bicycle, has provided an important lever for a more inclusive world economy.

AK: It is fair to say that the 2008 global financial crisis impacted the rules of the game concerning the global economy in a significant way, providing emerging and developing economies with more opportunities to participate? In what way, if any, does this relate to GVCs? What is the interplay between emerging and developing economies and GVCs?

EB: I'm not sure that we understand the causal links, but it is true that the relative importance of advanced and emerging [economies] in the GVCs started shifting around the global financial crisis.

My own sense is that the shift was more driven by changes in information technology and related logistics, but emerging economies were less affected by the global financial crisis and perhaps this helped them get a foothold in some value chains, and they have built from there.

What is clear is that the perspective has changed in many emerging economies. The“truths” about how to build and run economies that come out of advanced economies are no longer accepted in the same unreflective way.

AK: What are your thoughts about the current geopolitical environment? Is it favorable for emerging and developing economies or somehow limiting their attempts to eradicate poverty and achieve prosperity comparable to that already visible in the developing world?

EB: There are several worrying aspects of the current geopolitical environment. The most immediate issue is the global vaccine situation.

Most emerging and developing economies with much lower levels of immunization are facing new waves of potentially more transmissible and more deadly variants of the [Covid-19] virus. This fundamental failure of global governance is feeding a mistrust in the emerging world of core institutions and new ideas for how to provide and finance global public goods.

Add to that tensions between US and China, between Russia and the rest of Europe and within geographical blocs and you have an unhelpful mix of geopolitics and geo-economics, likely to affect emerging and developing economies the most.

AK: What should be done to improve supply-chain resilience in the post-pandemic period without deepening existing trade and geopolitical fault lines?

EB: Many companies are considering changing suppliers, operating with multiple suppliers, and perhaps building larger buffers, but it is too early to say where they will come out.

Having multiple suppliers and larger buffers is costly and the efficiency pressures that gave rise to the GVCs are still there. Shifting suppliers is also associated with increased costs.

GVCs depend a great deal on personal relationships and trust built over many years. My hope is that these relationships and the economic values associated with them will help bridge trade and geopolitical fault lines or at least prevent them from opening up even more.

AK: What are the main challenges to GVCs in the short and long terms?

EB: We argue that most of the challenges mentioned so far are dwarfed by the pressures on the lead GVC firms to decarbonize along the entire value chain. Many companies have already made far-reaching commitments, and others are coming under increasing pressure to do so. While this is a challenge for the GVCs, it is also an opportunity in the fight against climate change.

AK: What is the recipe for successful decarbonization of production and transportation along GVCs?

EB: The GVC companies have the tools and the authority, and increasingly the incentives, to implement policies along the value chain. This, in turns, creates opportunities for countries to attract GVC investment by offering low-carbon infrastructure, like renewables and green multimodal transportation systems.

The combined incentives for GVC firms and potential host countries create a virtuous circle of decarbonization. A multilateral development bank like the AIIB can help translate this into high-quality infrastructure projects. 

AK: How can GVCs help us reach the 2015 Paris Agreement's goal of limiting warming to 1.5 degrees Celsius and ultimately save our planet and human species from extinction?

EB: The GVCs offer an additional tool to achieve decarbonization across countries and sectors. So far, we have mostly relied on peer pressure through the Paris Agreement and now most recently COP26. The GVCs offer a valuable complement and an opportunity to channel peer pressures into concrete action.

AK: What is the role of multilateral development banks like the AIIB in achieving this goal?

EB: Multilateral development banks have an important role to play in translating the virtuous circle between GVC lead firms and potential host countries of GVC investments into concrete investments.

They can work with individual companies identifying decarbonization opportunities and with governments to develop ideas for infrastructure investments and ensure that these projects meet international standards and make use of the best possible technologies. 


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