How Global Value Chains, Much Hyped by Development Experts, Slowed Growth and Preserved Inequality in Middle Income Countries

Yves here. Economists have much to answer for. This post describes (and IMHO is not even remotely critical enough) of how the World Bank and other powerful voices sold the canard to developing countries that opening themselves to “global value chains” as in multinationals and their foreign contractors, would provide a boost by improving wage rates and workplace conditions. Huh? Many of these companies shopped the globe to find locations where they could exploit workers. Look at Apple’s rap sheet for labor abuses or the shameful sweatshops that produce fast fashion.

So even though this post is far too anodyne, it does describe a serious and widespread problem.

By Alf Gunvald Nilsen, professor of sociology at the University of Pretoria. His research focuses on the political economy of development and democracy in the global South. His most recent book is Adivasis and the State: Subalternity and Citizenship in India’s Bhil Heartland (Cambridge University Press). Originally published at openDemocracy

The future of work and the future of poverty are closely bound up with each other.

Global value chains, those webs of firms criss-crossing the world that collectively bring products to market, have driven economic growth since the 1980s. According to the World Bank, they have enabled many countries in the Global South to transition from low-income to middle-income status within the past few decades.

For example, 100% of South Asian countries were categorised as low-income in 1987. In 2023, it was just 13%. The rest had transitioned to a higher status. As of 2024, the World Bank defines middle-income countries as those with a gross national income per capita between $1,136 and $13,845.

Statistics like these have led to a strong belief within much of the development industry that global value chains offer companies and countries the prospect of “upgrading”. Once integrated into them, it becomes possible for firms to improve efficiency, move towards producing higher value-added products, and shift to higher positions in the global value chain hierarchy.

By extension, global value chains also open up opportunities for “social upgrading”. Alongside economic growth, improvements in employment, remuneration, workers’ rights, and workplace safety are all possible. To their proponents, economic growth fuelled by integration into global value chains is nothing less than a rising tide that lifts all boats.

There’s just one small problem. This scenario has, with few exceptions, failed to materialise. The new wealth has been so unequally distributed that middle-income countries are still home to 70% of the world’s poor. The fact is, workers in these countries continue to capture little of the value they create. As long as work remains structured as it is, many cannot do more than toil to maintain their poverty.

The latest World Development Report suggests that even the World Bank is beginning to understand this. Sounding a note of warning about the economic state of middle-income countries, the report says the upward trend of eradicating poverty is coming to an end. Economic growth in middle-income countries is slowing down every decade, and income levels are not catching up with those in advanced economies.

But while the report acknowledges many real and worrying problems, it continues to ignore the elephant in the room. Power relations between the Global North and Global South are deeply unequal, and the Global North uses that inequality to its punishing advantage.

By omitting this dynamic, the World Bank renders the “middle-income trap” a technical problem, when it is in fact deeply political. And technical solutions can’t solve political problems.

The ‘Technical’ Issue

The problem, according to the report, is the development strategies that worked well for low-income countries yield diminishing returns after the transition to middle-income status.

These initial strategies typically focus on attracting foreign direct investment. But middle-income countries’ biggest need is to boost the sophistication of their economic structures. Without this, many countries find themselves unable to move beyond the middle-income tier that investment-centred development strategies had propelled them to.

In and of itself, this diagnosis is not particularly controversial. Critical scholars in development studies have long questioned neoliberal claims that participation in global value chains alone is enough to guarantee prosperity. But it’s not this belated acknowledgement that is so interesting. It’s what the report continues to hide from view, and how it pulls off that disappearing trick so well.

“To achieve more sophisticated economies, middle-income countries need two successive transitions, not one,” the report tells us. First, the investments that enabled the transition to middle-income status need to be coupled with “infusion”. This means policies that deliberately encourage the spread of new knowledge and cutting-edge technology across the economy.

As middle-income countries run out of new technologies to infuse, they must then transition again to driving innovation. Flows of physical and financial capital must be complemented by human capital, which is achieved by offering “the conditions cherished by innovators”. According to the report, these are freer economies, human rights, and liveable cities.

The report further advises middle-income countries to calibrate their mix of the three i’s – investment, infusion, and innovation. Actors not driving economic change must be disciplined. Creativity must be rewarded. Outdated policies and institutions must be removed. Finally, markets must be made globally contestable through “openness to foreign investors and global value chains”, so that domestic firms can access the markets, technology, and know-how that will allow them to add value and grow.

It all sounds very technical – which is exactly where the point gets missed. Achieving these transitions is not simply a matter of following the World Bank’s playbook correctly. It’s a matter of politics. Particularly, it’s a matter of how countries in the Global North leverage unequal power relations to prevent these transitions from taking place.

Tania Murray Li, an anthropologist who has laboured on the frontlines of critical development research since the late 1990s, writes in her book The Will to Improve that development interventions are predicated upon “rendering technical”. This, she argues, simultaneously renders the issue non-political by removing power relations from the equation. “Antipolitics of this kind is subliminal and routine,” Li writes. “Experts are trained to frame problems in technical terms.”

This is exactly what the experts penning this year’s World Development Report have done. Seemingly, the “middle income trap” is something that happens when a state forgets to encourage infusion or drive innovation. A kind of macroeconomic oopsie that can be rectified by simply remembering what to do.

This is techno-politics, to borrow a term from the political theorist and historian Timothy Mitchell. And this techno-politics occludes very significant aspects of the position that middle-income countries in the Global South occupy in the world economy.

Global Inequality at its Heart

The transformations that brought about the rise of middle-income countries were part of a larger restructuring of geoeconomic power relations that began in the late Cold War era. Transnational corporations began to relocate their manufacturing operations outside the Global North, both to escape the power of organised workers and to tap into the vast reservoirs of cheap, unorganised labour on the world’s economic periphery.

At the same time, in the context of the international debt crisis of the 1980s, the International Monetary Fund and the World Bank enforced structural adjustment programmes on many countries. These compelled governing elites in the Global South to deregulate their economies and open up to investments from abroad.

These steps laid the foundation for the global value chain system that has emerged since the end of the Cold War. Rather than being integrated within national spaces, different parts of the production process are dispersed across the globe under the coordination of transnational corporations.

It is through their integration into these value chains – predominantly at the point of manufacturing, but also through raw material extraction and business process outsourcing – that many countries in the Global South made their transition from low-income to middle-income status. It is also in this context that their growth trajectories are currently decelerating.

The Power to Prevent Progress

The above is one level of understanding for why our global economy is currently structured the way it is. But if we layer power relations onto this history of development, an altogether different understanding emerges.

The developmental constraints many middle-income countries face are not rooted in technical policy issues. Instead, global value chains have entrenched capital’s inordinate power over labour, which, as Benjamin Selwyn has argued, has enabled the super-exploitation of workers and the suppression of further developmental transformations.

The companies at the head of these chains profit from this arrangement and use their immense power to maintain the status quo. Politicians in the Global North use their own power to reinforce these companies’ advantage, as they are ultimately bringing cheap goods and services to their home populations.