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Jimmy Truong

19970116-6275
IR150L Module 2
Sustainable Economic Growth: Why does it matter?

Introduction

This paper builds on The World Development Report (WDR) 2020: Trading for
Development in the Age of Global Value Chains, a flagship report issued by the World Bank
Group. This paper also reviews the success and challenges of GVC.

Economic growth has been the backbone for changes in the living standards of millions of
people around the world. Close to 690 million still lives in extreme poverty, surviving on less
than $1.9 a day. Compared to 1.9 billion living in extreme poverty in 1990. The openness of
trade and the integration of GVC has been contributing to better economic performances,
especially in developing countries, since economic growth helps poorer households escape
poverty. International trade started to expand rapidly after 1990. The rise of GVCs and gains
stemmed from productivity within GVC has generated greater income gains than the
commensurate expansion of traditional trading. The unemployment rate hit its lowest in 2007
before the global financial crisis and has since, started to recover but not fully.

In recent years, the support for free trade has declined in some parts of the world and new
trade barriers have arisen. The US-China trade war could have disastrous effects on
international trade because of the raise on tariffs on consumer goods. Although protectionism
has been helpful for countries like China and South Korea, it wouldn’t work for most of the
developing countries today. Another problem with an increase in CO2 emission, pollution,
and inequality makes it harder to pull the remaining out of extreme poverty.

1990 to present day

The report displays a liberal way of how GVC has been an important factor to enrich
developing countries, but also side effects of some other major issues. One of the issues is the
increasing gap between the poorest and the richest individuals, but also inequalities.

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Jimmy Truong
19970116-6275
IR150L Module 2
GVC has existed for centuries but started to grow as technological advances emerged. GVC
grew rapidly from 1990 to 2007 and stagnated after the global financial crisis in 2008. The
rise of GVC helped economic growth in developing countries. Vietnam produces 40 percent
of Samsung’s global phone products and is the second-largest smartphone exporter (Nikkei
Asian Review, 2018; Sturgeon and Zylberberg, 2016). Their success can be drawn to the
trade liberalization by the World Trade Organization. Vietnam and Bangladesh have a
comparative advantage in industries that concentrate on the natural advantages or
endowments, like a large poor population that will be most efficient in industries that require
cheap labor (O’Brien and Williams, 2015:105). Importing electronic components and parts
from regional suppliers such as Thailand, Japan and China helped investors gain access to
inputs of high quality. According to the World Bank, the GDP of Vietnam was $6.472 billion
in 1990 and has increased to $261.9 billion as of 2019. Vietnam is a case where GVC has
helped increase a nation's wealth but also increased their CO2 emissions. Statistics from
World Bank show that Vietnam’s CO2 emissions per capita increased by 993% from 1990 to
2019.

The bicycle is a heavily traded product with parts from different parts of the world. Producing
a bicycle requires wheels from one part of the world and brakes from another (World Bank
Group, 2020:16). Adam Smith tries to dynamite the underpinnings of mercantilism in his
book, the wealth of nations. Mercantilism is an economic theory, like many other economic
theories, trying to increase a nation’s wealth. The underpinning of mercantilism is, for a
nation to grow richer, it needs to make everything within its borders. Adam Smith argues that
no country could specialize in all products and be good at it because some countries had
natural strength in particular areas.

Although GVC has been successful for developing countries, many other issues such as
inequality, pollution, and inflation may occur. Inequality in markups for bigger firms where
they can source their products for a fixed cost of $10 and sell it to their customers for $200.
When a manufacturing cost is that low, it usually means that labor workers are more likely to
have bad working conditions and no insurance in case of any accidents. Inflation is another
major issue with economic growth. Economic growth equals more money for consumers,
which could cause a short supply due to high demand, also called demand-pulled inflation.

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Jimmy Truong
19970116-6275
IR150L Module 2
The law of supply and demand suggests that prices will rise because more people want a
certain product. For example, the demand for graphics cards, also known as GPU, in PC-
building has risen significantly since 2019. The price reflects increases in
cost for components, operating costs, and logistical activities plus a continuation of import
tariffs. The cause for the short supply can be drawn to the pandemic, where most people are
starting to play online games, but also more and more are becoming interested in mining
Bitcoins and other cryptocurrency. The components can be easily sourced in Asia, while it's
harder in the US. Prices of everyday utilities and products rise when inflation occurs. There
are a few ways to look at this issue. The realist perspective would say that human beings are
greedy and will increase prices as there is more demand than supply. Although, the liberal
view would say that due to higher demand, the company needs to expand their business with
more employees, higher wages, and buy more land if it’s an agriculture company. Keynes’
law of supply and demand explains that any change in aggregate demand causes changes in
real GDP and employment and that demand creates its own supply (Khan Academy).

Environmental issues connected to shipping are the biggest issue with GVC. CO2 emissions
when producing products to import and export is polluting the environment. Pollution from
oil spills and bilge water, which means a mix of oil and other chemicals are leaking from
engines, are a huge problem. When shipping cargo with ships, boats need to take onboard
ballast water to keep balance and stay afloat. This would in turn lead to invasive species
getting transported and released to an environment where they’re not natural predators and
could pose a threat to the ecosystem (World Bank Group, 2020:123). The extinction of
species would be devastating for the ecosystem. The rise of GVC has polluted areas where
production is growing, which affects the population in that area. The green theory describes
that environmental injustice arises when unaccountable social agents “externalize” the
environmental costs of their decisions to innocent third parties that do not know (Eckersley,
2013: 264). Transboundary pollution originates in one area and causes damage in other
environments through water. Pollution and other kinds of environmental degradation can lead
to market failure since it imposes negative externalities. World Trade Organisations efforts to
open protected market and expand world markets are a big problem for the environment since
it damages the environment by destroying local sustainable agricultures, but also encouraging
long-range transports from continent to continent (Vogler, 2020: 392).

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Jimmy Truong
19970116-6275
IR150L Module 2

Urbanization has occurred more in recent years due to GVC. The reason for this circumstance
is that a bigger part of the population is being pulled to the city to work. GVC helps create
jobs in a domestic economy that in turn helps improve economic activity. Urbanization is an
excellent way of handling environmental problems with emissions. Concentrating all
emissions in one area is better for the environment than spreading it out. It also allows more
people to have access to services that are more environmental-friendly at better prices
(Kuddo, Robalino & Weber, 2015). China is an example of how industrialization and
transformation of living standards can be fueled by urbanization. Passing a milestone of 50
per cent of its population living in cities, from a 20 per cent in the 1980s. The average
Chinese household income is almost three times as high as those in rural areas. A reason for
this is because of higher productivity. Urbanization is a driver of development since cities are
seen as “engines of growth” (Ravillion, 2009).
Although urbanization is great for our environment, it affects households with minimum
wage. The report mentions that the integration of GVC is associated with rapid urbanization
and the cost of living and transport is rising quicker than inflation, meaning that the increase
in salaries is rising slower than the cost of housing and utilities (World Bank Group, 2020:
199). From a realist perspective, government policies can help increase the minimum wage of
a state. The minimum wage should be linked to productivity growth, but also the cost of
living.

Technological advances are making everyday life easier for the individual. Amazon is
making it more convenient for the retail consumer to order online and get the products
delivered to their door. Amazon increased its profits by nearly 200% since the start of the
pandemic. Most parts of the US were under lockdown during the start of the pandemic, which
made it more convenient for the individual to order everything online instead of going to
Walmart or other grocery stores with the risk of getting infected by Covid-19. Convenience is
king.
Small businesses and retailers were already struggling to compete with the e-commerce
companies that could attract customers with fast deliveries and lower prices. Small businesses
and retailers don’t have the resources to go online or offer the same price as the e-commerce
companies, which usually leads to them going out of business and getting more debts. E-
commerce is a convenient and good business. Especially since most people don’t have money

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Jimmy Truong
19970116-6275
IR150L Module 2
for a physical store, it’s easier to go online. Trade liberalization has made this business model
possible. When buying things outside of the EU, a 25% VAT is usually included, but it
doesn’t affect the business, but rather the customer.

Is GVC good or bad?


The report puts the good things of GVC on a pedestal. The growth of GVC has done many
good things, including help households around the world escape poverty. Like all great
things, they’re coming to an end. Economic activity helps the global economy flow and
sometimes leads to inflation, but at what cost? Most people like to upgrade the things they
have when they start to earn more, like buying a bigger house or a faster and more reliable
car. What happens if these people are getting unemployed out of a sudden because of
deflation? The report mentions that GVC grew rapidly from 1990 to 2007 and stagnated after
the financial crisis in 2008, where the unemployment rate went from 5% to almost 10%. The
U.S employers shed 2.6 million jobs in 2008. The basic answer from a realist perspective is
to let government policies solve the problem. In case of deflation, increase government
spending, cutting taxes, and lower interest rates to help stimulate the economy could be a
potential solution.

When arguing whether GVC is good or bad, the good impacts of GVC outweighs the bad.
The issues regarding GVC could be solved over time, as it enriches countries, it could help
states implement free education and healthcare. Education extends creativeness and
knowledge in different areas and could potentially solve the environmental issues regarding
GVC. The Capitalist system rewards hard workers and those who provide a solution to
society. For example, doctors, save lives and lawyers, uphold the law.

Sustainable economic growth is important for the future, for all parties involved. When
pulling countries and individuals out of poverty, they need a guarantee that they won’t be
pulled back. The rate of growth needs to be maintained without creating other economic
issues. Policies are needed to protect workers from losing their income. This is more
important in countries with higher housing and utility costs. Denmark’s flexicurity model is a
great example, where employers can hire and fire workers without throwing the workers
under the bus. The workers are protected with unemployment benefits (World Bank Group,
2020:6).

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Jimmy Truong
19970116-6275
IR150L Module 2

The cooperation of international trade with lower trade barriers has been successful.
Although, the retreat from globalization in industrial countries, where workers feel like they
haven’t benefited from it and the firm feels like their competition is unfair is a reason why the
system is under stress. In regard to social and environmental standards, consumers are
becoming worried (World Bank, 2020:220). Adam Smith refers to this issue as the “invisible
spectator”, where he explains that we have strong feelings when we witness injustices, which
makes it possible to avoid self-interest. In November 2017, H&M received massive critique
after publishing a product of an African child in a “Coolest Monkey” hooded top (Stack,
2018). According to Statista, H&M made a loss in revenue between 2017 and 2018, from
$27.696 billion to $23.232 billion. This could be the effect of the invisible spectator, where
consumers boycotted H&M following this incident because they were witnessing injustice
against black people. A loss in any part of a GVC could damage the chain. In theory, if H&M
went out of business, it would affect the employers, employees and factories that are not
owned by H&M. In turn, consumers would not be able to get ahold of cheap clothing, leading
to many workers losing their jobs and a loss in economic activity. Consumption is great for a
society since it pays the bills and salaries for a company.

In conclusion, to obtain sustainable economic growth, developing countries can’t grow too
fast. An excess in growth would lead to inflation and an increasing in the prices of housing.
In regards to workers starting to earn more money and the necessary things are getting more
expensive is not a good combination. Governments are fighting inflation with wage and price
controls, but that would eventually lead to recession and losses in jobs. The liberalization of
free trade has helped countries and individuals around the world and will continue to do so.
The cooperation of free trade helps all countries with reduced trade barriers and will help
others that are stuck in development. In regards, to environmental issues, it’s possible to
solve these problems as countries are becoming more technologically advanced. Sustainable
economic growth matters, because when facing environmental issues, we need to slow down
global warming and limit CO2 emissions. Protecting non-renewable resources is important
because it means that we can maintain growth which wouldn’t be possible if non-renewable
resources run out. The rapid growth of GVC between 1990 and 2007 was not sustainable.
The invisible spectator has grown in recent years and could be the end for firms that are
practicing injustices.

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Jimmy Truong
19970116-6275
IR150L Module 2

Bibliography
Eckersley, R. (2016). ‘Green Theory’ in Dunne et al, International relations theories:
discipline and diversity. Fourth Edition. Oxford: Oxford University Press, p.258-280.

Khan Academy. ‘Keynes’ Law and Say’s Law in the AD/AS model’. (Accessed on 16 April
2021). https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-
and-expenditure-topic/macroeconomics-keynesian-economics-and-its-critiques/a/keynes-law-
and-say-s-law-in-the-ad-as-model-cnx.

Kuddo, A., Robalino, D.A., and Weber. M. (2015). “Balancing Regulations to Promote Jobs:
From Employment Contracts to Unemployment Benefits.” World Bank, Washington, DC.

Nikkei Asian Review. (2018). “Samsung Suppliers in Vietnam Branch Out to New
Frontiers.”. https://asia.nikkei.com/Business/Business-trends/Samsung-suppliers-in -
Vietnam-branch-out-to-new-frontiers. (Accessed on 12 April 2021).

O’Brien, R., & Williams, M. (2015). Global Political Economy: Evolution & Dynamics (5th
Ed.). London: Palgrave Macmillan

Ravallion, Martin. (2009). ’Are there lessons for Africa from China’s success against
poverty?’, World Development Vol 37, No 2, pages 303–313; also see reference 2, World
Bank (2009).

Stack, Liam. (2018). “H&M Apologizes for ‘Monkey’ Image Featuring Black Child”.
(Accessed on 13 April 2021). https://www.nytimes.com/2018/01/08/business/hm-
monkey.html.

Statista. (2020). ’Sales of the H&M Group worldwide from 2007 to 2019 (in million U.S.
dollars)*’. (Accessed on 13 April 2021). https://www.statista.com/statistics/252190/gross-
sales-of-the-h-und-m-group-worldwide/.

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Jimmy Truong
19970116-6275
IR150L Module 2
Sturgeon, Timothy J., and Ezequiel Zylberberg. (2016). “The Global Information and
Communications Technology Industry: Where Vietnam Fits in Global Value Chains.”. Policy
Research Working Paper 7916, World Bank, Washington, DC.

Vogler, J. (2020) ‘Environmental Issues’ in Baylis et al, The Globalization of World Politics.
An Introduction to International Relations, (8th ed) Oxford: Oxford University Press.

World Bank Group. (2020). ‘The World Development Report (WDR) 2020: Trade for
Development: In the Age of Global Value Chain.’ Washington D.C. World Bank Group.
(https://www.worldbank.org/en/publication/wdr2020)

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