Value Chains and Industrial Development in South Africa

This chapter focuses on the dynamics of global value chains (GVC) engagement and industrial development in South Africa through two case studies—the automotive and textiles/apparel sectors. The further industrialization and development of South Africa and of the Southern African region will depend heavily on further developing their engagement in GVCs and simultaneously upgrading their capacities into higher valued and more skill and intensive activities. The automotive industry is import and export intensive, offering the potential for technological advancement, increasing skill intensity and upgrading, and positive economic spillovers. Apparel is domestic market oriented, sourcing domestically, regionally in Southern Africa, and from Asia. It is an example of a low technology, labour intensive industry, exhibiting lower levels of managerial capabilities and skills. It is challenged by raising capabilities to meet new value chain requirements and extending the supplier base to increase value addition (and by implication employment) in the economy.

Determinants of Domestic Value Added in Exports: Empirical Evidence from India’s Manufacturing Sectors

Over the last decade, trade policy reforms have significantly influenced the internationalization of Indian manufacturing firms, leading to deeper participation of the country in global value chains (GVCs) and international production networks (IPNs). With the growing participation of foreign firms in the value chain, the domestic value-added (DVA) content embodied in Indian exports have displayed a declining trend. Recently, in 2020, India has decided to launch the ‘Atmanirbhar (self-reliant) Bharat Abhiyan’, which, in principle, aims to consolidate the manufacturing sector, leading to increasing DVA embodied in exports (DVA-content), apart from employment generation. The current article attempts to analyse the drivers of India’s DVA in exports for select manufacturing industries over 2000–15 by using the OECD trade in value added (TiVA) database. The empirical results reveal that sectoral DVA content is positively influenced by both domestic capital and foreign direct investment (FDI), and labour skill intensity, but negatively influenced by the presence of unskilled workers. Moreover, FDI inflows in sectors characterized by high skill-intensity and high-relative growth rate play a crucial role in influencing DVA content. Finally, the presence of larger and more capital-intensive firms is found to be a major driver of DVA. On the policy front, therefore, the empirical results underline that export promotion policies alone will not be able to resolve employment worries, a major concern in India, as vast numbers of unskilled and low-skilled workers trapped in the agricultural sector or working in unorganized and micro-industries fail to figure in the country’s export value addition. A concerted effort towards labour skill enhancement as well as technology transfer is necessary for exports to play a more positive role.

Distributional Implications of Unemployment-Reducing Policies

We study the distributional implications that follow from the fact that higher-income households tend to consume higher-quality goods. This is done through a two-sector model in which one sector produces vertically differentiated products, whose skill intensity is an increasing function of quality. The skilled-to-unskilled wage ratio is fixed at a level sufficiently low that some unskilled workers remain unemployed. We show that uniform technological progress increases the unemployment rate, and we consider a number of policy responses to alleviate the “plight of the less-skilled”. Political economy consequences are emphasized, as we assess each policy’s chance of receiving political support. We conclude that a budget-neutral subsidy for the employment of unskilled workers is a viable policy option.

Gender differences in the skill content of jobs

There is significant heterogeneity in actual skill use within occupations even though occupations are differentiated by the task workers should perform during work. Using data on 12 countries which are available both in the Programme for the International Assessment of Adult Competencies survey and International Social Survey Program, we show that women use their cognitive skills less than men even within the same occupation. The gap in skill intensity cannot be explained by differences in worker characteristics or in cognitive skills. Instead, we show that living in a partnership significantly increases the skill use of men compared with women. We argue that having a partner affects skill use through time allocation as the gender penalty of partnered women is halved once we control for working hours and hours spent on housework. Finally, we do not find evidence of workplace discrimination against women.

IMMIGRATION, ENDOGENOUS SKILL BIAS OF TECHNOLOGICAL CHANGE, AND WELFARE ANALYSIS

This paper investigates the long-run effects of immigration on wages and welfare in a model with endogenous technology choice (ETC) where firms are allowed to choose their optimal skill intensity from a menu of available technologies. I embed the ETC framework into the Auerbach and Kotlikoff model (1987) that features a large set of overlapping generations, a rich collection of population dynamics, and a social security system. I calibrate the model to match with the U.S. data and evaluate the effect of ETC with the help of two experiments. In the first experiment, I increase the share of high-skilled immigrants and compare the wage and welfare predictions of the model with ETC to a standard model where the skill intensities in production technology are fixed. In the standard model, since the skill intensities are constant, increase in the supply of high-skilled labor leads to a decrease in high-skilled wages and an increase in low-skilled wages. On the other hand, in the model with ETC, negative supply-side effects are counterbalanced by an increase in the intensity of the more abundant high-skilled labor, leading to a smaller decrease in their wages. The discrepancy between wage predictions of these two models is also reflected in the welfare: while the model with ETC predicts an increase in both high- and low-skilled natives’ welfare, the standard model would predict a decrease in the welfare of the high skilled and a larger increase in the welfare of the low skilled. In the second experiment, I examine the effects of an increase in low-skilled immigration and find that in this case, since the initial production technology is low-skilled intensive, the ETC effects are smaller. These results imply that if ETC is ignored, both in the short run and long run, wage and welfare analyses of immigration will be incomplete, and even misleading.

Labour Market Adjustment and Intra-Industry Trade: Empirical Results from Indian Manufacturing Sectors

During the last two decades, India has witnessed several trade and industrial policy reforms. The objective of the study is to examine the relationship between dynamism of India’s two-way trade, measured through Marginal Intra-Industry Trade (MIIT) index, and labour market adjustments, reflected through absolute employment changes, in select manufacturing sectors over 2001–2015. India’s MIIT in select sectors generally display an upward trend over the sample period, while a mixed dynamics is observed on the employment front. The generalized method of moments (GMM) estimation results indicate that MIIT, increase in productivity, skilled workforce intensity, industrial concentration, incremental FDI inflows and trade openness positively influence absolute employment changes, whereas unskilled wage exerts a negative impact on the same. The analysis further concludes that high relative growth rate, skill-intensity, incremental FDI inflows and higher productivity in a sector, also characterized by higher MIIT, may lead the firms to employ more productive and competitive resources, resulting in higher absolute changes in employment. The obtained results do not support the Smooth Adjustment Hypothesis (SAH) predictions in the Indian context.

Indonesia Industrial Productivity Growth: Evidence of Re-industrialization or De-industrialization?

This study employs a Stochastic Frontier Analysis to decompose Total Factor Productivity for the manufacturing corridor of Indonesia. Technological progress, technical efficiency change, and scale effects are captured at a firm level covering all Java provinces from 2007 to 2013. The period is of particular interest as it covers the efforts of re-industrialization under the Master Plan for Acceleration of Indonesian Economy (MP3EI) and the sharp increase-decrease in global demand and global prices. The study captures sources of productivity growth supporting/deterring output growth, differentiating across firm characteristics based on size (large and medium), technology intensity, skill intensity, location (province), and capital-output ratio employed in production. As firms differ in the five elements, productivity and efficiency performance also differ. This paper questions whether productivity growth is limited to conventional sources -input growth and technological progress-, or if manufacturing is managing some gains through non-conventional channels -technical efficiency and scale effects. The paper also questions the presence of patterns in productivity among group firms (characteristics), finding that firms which combine a low-tech level, a higher skill ratio, and are medium in scale reported TFP at least 70 % higher than the average firm. Combinations of firm size, technology, skills, and ratio output affect the performance. Cost analysis of factors of production is also carried out, finding that energy is canceling out possible gains in scale effects by rising disproportionately both in consumption and prices. TFP growth was found to be negative and falling, raising the possibility of a path towards de-industrialization.

Ability-Biased Technical Change and Productivity Bonus in a Nested Production Structure: A Theoretical Model with Endogenous Hicks-Neutral Technology Spillover

This paper develops a model of endogenous trade-mediated productivity spillover in which jointly trade-intensity, capital-intensity of production, and skill-intensity for adoption of technology from an exogenously available stock of world knowledge determine firm’s productivity. The representative firm, in the process of maximising profit (or minimising costs), takes into account the benefits of technological improvements embodied in imported intermediates. Sectors with higher skilled labour intensity will have an advantage in extracting the ‘bonuses’ from spillovers. The framework is useful for exploring technology adoption, considering wage premium, investigating innovative changes in sectors, and analysing productivity differences.

Economic and Social Upgrading in Global Value Chains: Insights from Philippine Manufacturing Firms

This study explores results of the 2012 Survey on Adjustments of Establishments to Globalization (SAEG) to analyze the economic and social upgrading experience of Philippine manufacturers within global value chains (GVCs). Three broad patterns emerge from the data. First, firms with stronger GVC linkages tend to have better labor indicators than purely domestic producers. Second, the majority of manufacturers either experienced or missed economic and social upgrading simultaneously. Lastly, almost all social upgrading is accompanied by economic upgrading but economic upgrading may take place without a social component. Against this background, this study uses bivariate probit regression to model the joint determination of the two separate but interconnected upgrading outcomes. The results indicate that the covariates in the model can be categorized based on their statistical significance: purely economic (i.e., employment size, unit labor cost, high skill intensity, and the Kaitz dummy), purely social (i.e., training, female intensity, and foreign equity), and both (i.e., contractualization, and process and product innovations). These results have several important implications. First, GVC firms’ notion of social upgrading is closer to the softer components of working conditions than to traditional measurable indicators such as employment, wages, and efficiency. Second, the results suggest direct and indirect channels through which technological upgrading may generate desirable social outcomes: the direct channel highlights that innovation should be accompanied by skills development to sustain higher value creation while the indirect channel underlines the potential of innovation to create upward spirals in output, productivity, and, ultimately, labor conditions. Lastly, there are some indications that the social benefits of economic upgrading may not be evenly distributed among different types of employment. Overall, the results emphasize the need for a holistic upgrading experience that shifts the country’s comparative advantage from cheap labor to innovative local industries and highly skilled workers.