Accounting for global value chains: rising global inequality in the wake of COVID-19?

ABSTRACT

Production processes depend on fragmented and interdependent value chains; nowadays, a single product often includes components produced in dozens of countries. Many public health measures being implemented to prevent the spread of COVID-19 have dampened economic activity of ‘non-essential’ sectors. The decreased production affects other industries and countries that supply parts, machinery, and services via global value chains. Using the World Input-Output Database, we show how a hypothetical decline in the worldwide consumption of a set of non-essential sectors affects the global distribution of GDP and employment. While richer countries consume relatively more non-essential goods and services, we find, by considering the interdependencies among developed and developing economies, that low-income countries are likely to suffer steeper declines in their GDP and employment. Specifically, for each 1% decline in the demand for non-essential products, the GINI index across nations is expected to rise by 0.3%. That is, global inequality is likely to rise, contradicting some earlier findings. Finally, we show that economies with less-diverse sets of industries are more vulnerable to such global shocks. This study highlights the role of value chains in analyzing the spatial spread of the impacts and their contribution to amplifying world imbalances.

KEYWORDS:

• COVID-19
• global value chains
• world input-output database
• inequality

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Our definition of non-essential goods and services, presented in Appendix 1, only pertains to final demand. By definition, any intermediate production that supports the production of ‘essential’ final goods is itself essential.

2. Recall at the start of the pandemic that our understanding of the means and mode of transmission of SARS-CoV2 and the use and efficiency of mitigation measures such as masks was incomplete.

3. For each industry, WIOD presents other components that are not considered for value-added or intermediate-consumption estimations, specifically, ‘taxes less subsidies on products’ and ‘international transport margins’. With respect to final demand, WIOD also offers a view on the aggregate ‘Direct purchases abroad by residents’ and ‘Purchases on the domestic territory by non-residents’, which allows characterization of exports and imports associated with tourism.

4. This is not yet the case as we revisit this paper in January 2021. Although it may be that many aspects what has been truly ‘essential’ will never be fully comprehended.

5. A great example of this with fascinating detail has been developed for case of the iPad in the article ‘iPadded: The trade gap between America and China is much exaggerated’ (The Economist, 21 January 2012).

6. The labor and capital compensation analysis excludes the ROW economy as this is not represented in the WIOD socio-economic accounts.