Flatness and acceleration in Human Development and International Trade

The World Development report from 2020 (WDR2020) ‘Trading for Development – in the Age of Global Value Chains’ gives a deep insight in the dynamics of Global Value Chains (GVCs). Not only on how they work but also how we may overcome the current stagnation. GVCs expanded highly in the period 1990 – 2007 and it slowed down after the financial crisis in 2008. Currently, we are in a phase of trade wars between USA and China and other kind of protection measurements on international trade between countries that further threaten GVCs.

In a GVC, the production process is across different countries (more than 2). An example is given with the production of a bike: frame, saddle, wheels, brakes and paddles all come from different parts of the world. This gives the opportunity to do a very specialized task. Each stage of the production process can be done by a firm that is specialized and efficient in doing a particular task. In this way, GVCs create hyperspecialization and durable firm-to-firm relationships.

GVCs are responsible for about half of international trade (in products as well as services). The worldwide benefit of GVCs is (income) growth, more and better jobs and reduced poverty.

It also results in increased worldwide transports and better payments for those involved in working in a firm that is part of a GVC and higher markup for the lead firms of the chain resulting in higher profits for those firms. The downside of GVCs is environmental damage and inequality.

One might say that the greatest benefit of GVCs has been the possibility for a lot of developing countries to get a great part of their citizens above the poverty level of $ 5.50 income per day. Countries that benefited greatly from GVCs are Bangladesh, China, and Vietnam which also had the steepest decline in poverty. The current ‘retraction’ of international trade may have deep impact in the number of people going back under this poverty level which may be up to 30 million. There is a lot at stake.

To get GVCs back on track, the report states as key solution: more (international) cooperation:

  • Restore faith and make a clear and transparent communication (e.g. on subsidies)
  • Include topics like market regulations (environment, standardization), trade and competition policies, and infrastructure

More international cooperation on those areas are very valid. But will countries move from less to more cooperation? The current situation looks different.

USA and international trade

Currently, the USA is taking steps to retreat from international trade and putting up more protection measures. Less cooperation. The WDR2020 report gives a striking similarity (Box 9.2 page 219-220) with Pax Britannica and the British trade agreement set up with the rest of the world when United Kingdom (Great Britain) had a market share of 20% of all world trade. It stepped out of this when the share fell below 10% (due to upcoming markets USA and Germany who took a greater share of world trade).

Source: WDR2020 Report ‘Trading for Development – in the Age of Global Value Chains’

The question is raised can there be a similar end of Pax Americana / GATT now that the market share of USA is falling rapidly from 20% (in 1947) in the direction of 10% due the upcoming market share of China and other emerging economies? The retrenchment process is already going on.

What is the underlying reason?

The proposed solution as written in the WDR2020 report is logical. However, will the American government also be logical in this way or will it thrive more on the sentiments and emotions of the majority of their citizens? Is it emotions or logic that rules the world?

The emotions are triggered by relativeness. If your personal quality of life is increasing, you feel good. If it decreases, you feel less good. Even when the overall quality of life is still very high. You feel less good when your neighbor has it better than you. If you are unemployed because your work is now being done in China or another part of the world (due to GVCs…), you will vote for protectionism in the hope that the good all days might come back.

In times of growth we flourish; in times of decline we wither.

How to get a picture of the progress on country level not just on economics? This may tell us more about the underlying sentiment. Therefore, I use the Humand Development Index. I took the following datasets from The World Bank (with data for each country in the world):

  • Human Development Index
  • Export and Import Index

The range of years is from 2000 to 2018. The index is for each country set at 100 for year 2000 which makes it possible to compare the progress between countries from a relative point of view.

The HDI is based on three measurements:

  • Life expectancy at birth
  • Literacy of people (how many people can read and write)
  • Standard of living measured by GDP

You can see the HDI as a kind of ‘life quality’ per country.

Human Development Index (HDI)

From the The World Bank HDI data, I made the following time lapse:

The level of darkness indicates a stronger growth. Almost all countries grow in HDI. Western countries already have quite a high ‘life quality’ so it is harder to grow. US, Europe, Australia are quite flat (light blue). South America and Russian Federation grows a bit. The big growth (dark blue) is in India, China and in general Asia. Africa is quite mixed. 

The biggest growth is in Ethiopia which is also referred to in the WDR2020 Report several times as a show case.

The USA is ranking with the absolute number HDI on position 15 but relatively (as indicated by the index) it is postion 8 from the bottom! The ‘quality of life’ overall is not changing so much.

If the total situation of a country is quite flat, this also implies that there is a group of persons experiencing a decrease, as there are others who still grow. Especially this group of ‘losers’ can have quite some big impact.

Orange implies a negative growth which is seen in Libya and Syrian Arab Republic. 

International Trade Index (ITI)

I averaged The World Bank Export and Import Index to an International Trade Index. Since firms that are part of GVCs are more active in export and import, it also gives also indication of the activeness of countries in GVCs. As mentioned before, GVCs are responsible for about half of international trade.

This is the time lapse 2000-2018:

The level of green shows how a country is progressing in international trade over the years. With the index set at 100 in 2000: alle countries start with the same color. The darker the color gets, the more growth a country has been going through.

USA, Canada, Japan and some Western-European countries are quite flat in light green. A bit more green: all other Western-European countries and Argentina. Green neutral: Australia and Brazil. The ‘winners’ are in dark green: Eastern-Europe countries (EU entrance effect) and especially in Asia: India, China, Cambodia, etc. Africa is again mixed. Ethiopia is doing very well again. 

HDI and ITI

A first impression already shows that HDI and ITI are correlated: there is a clear relationship. This is plotted in the next time lapse with the country color indicating the growth in ITT per year and (as with the previous ITT time lapse) and a circle showing the progress in HDI. For contrast purposes, I reversed the color: the darker orange, the higher the growth. Blue indicates a decrease in HDI (in 2018, only Libya and Syrian Arab Republic as stated before).

Each country starts with the same colored circle (index 100) and the range goes stepwise from 2000 to 2018. It is especially good to look at which ranges of the world are more light colored (green and orange) and the ones that are more dark orange colored (green and orange). Parts of Africa and China, India, parts of Asia are darker green and orange and make the better progress.

The most ‘Western’ countries are still in a growth phase (still in green) – however much less than the successful developing countries. This could be called as a phase of ‘flatness‘ versus the phase of ‘acceleration‘ of the successful developing countries.

HDI and ITI are each set in 3 groups (having about the same number of countries in each group) creating the following matrix showing the number of countries in each cross-section:

HDI-lowHDI-midHDI-high
ITI-low34133
ITI-mid92319
ITI-high41727

The dominant diagonal from HDI-low/ITU-low to HDI-high/ITI-high shows the correlation between HDI and ITI.

These are the countries that are both low in HDI and ITI: Argentina, Austria, Barbados, Belgium, Brunei Darussalam, Canada, Denmark, Dominica, El Salvador, Fiji, Finland, France, Germany, Greece, Ireland, Israel, Italy, Jamaica, Japan, Liberia, Libya, Luxembourg, Mexico, Norway, Palau, Portugal, Samoa, Spain, Sweden, Syrian Arab Republic, Tonga, Trinidad and Tobago, United Kingdom and United States.

High score in both HDI and ITI are: Afghanistan, Albania, Angola, Bangladesh, Benin, Burkina Faso, Cambodia, Chad, China, Ethiopia, Ghana Guinea, India, Kazakhstan, Mali, Mauritania, Mongolia, Mozambique, Myanmar, Niger, Rwanda, Sao Tome and Principe, Sierra Leone, Turkey, Uganda, Uzbekistan and Zambia.

Note: I put some countries in bold as they are referred to more often in the WDR2020 report (Vietnam and Czech Republic are not in because these countries had not data covering the whole period from 2000 to 2018).

See below the progress from a couple of countries in steps per year from 2000 to 2018. The overall index of all countries is plotted as ‘World’. China, India, Bangladesh, Cambodia and Ethiopia are accelerating in Human Development and International Trade – each in its own way. The United States is not moving so much. Quite a difference between United States and China!

The growth of progress in United States is quite flat for already 20 years (especially the last 8 years, it is stuck around an ITI of about 200 and an HDI around 1.04). As they say: no progress is stagnation. I believe that this is causing a negative sentiment for a great part of the country.

Conclusion

The world splits ‘grosso modo’ in two parts:

  1. Flatten countries‘ with a only a slight, flat growth in Human Development Index and International Trade Index: e.g. Unites States, Western-European counties, Australia, Canada, Japan
  2. Accelerating countries‘ with increasing HDI and increasing ITI growth: e.g. India, China, Cambodia, Bangladesh, Ethiopia

As stated in the WDR2020 report, these two worlds should come together with more international communication:

  1. Industrialized countries should pursue open, predictable policies
  2. Developing countries should undertake deeper reforms

These are logical and valid recommendations. However, I think that the big challenge is to get the industrialized countries come out of the state of ‘flatness’. This is the phase of low growth in development both in economics (ITI) and more human related part (HDI). Flat growth implies a decline for a part of a country’s population because there will also be groups that still prosper in a country. This creates a negative sentiment from a growing part of a country’s citizens.

I believe that growth does not need to be in economics, it can also be achieved in other directions, e.g. durability – but it needs the positive sentiment from you, me and others in order to succeed. This will give international communication a chance and the opportunity for GVCs to make a good cause.

Sources

WDR2020 report: https://www.worldbank.org/en/publication/wdr2020
edX course: https://www.edx.org/course/global-value-chains-wdr-2020

Data sources from The World Bank

Export https://data.worldbank.org/indicator/TX.VAL.MRCH.XD.WD
Import https://data.worldbank.org/indicator/TM.VAL.MRCH.XD.WD
Human Development Index http://hdr.undp.org/en/data

Note: in the time lapses, those countries are included for which The World Bank had data from 2000-2018 (not included countries are grey).

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