Has India Gained by Linking into Global Value Chains? -A Labour Market Analysis. Karishma Banga. University of Cambridge

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1 Has India Gained by Linking into Global Value Chains? -A Labour Market Analysis Karishma Banga University of Cambridge

2 Overview What are Global Value Chains (GVCs)? Employment effects of trade in GVCs Contribution of the study Trend Analysis Data sources and Methodology Empirical results and policy implications

3 India and Global Value Chains GVCs: fragmentation and dispersion of economic activities Trade in tasks gaining importance over trade in goods. Make in India to make India the next big manufacturing destination. Improving employment and skill development. Next big step in linking within Global Value Chains.

4 Employment effects of trade Substitution effect : import of cheaper imported inputs, increases the elasticity of substitution of labour. Scale effect : cheaper imported inputs boost output and exports, increasing employment. Labour dimensions (Jiang and Milberg,2013): 1. Domestic labour in exports, foreign labour in imports 2. Foreign labour in exports, domestic labour in imports 3. Third country labour in imports

5 Measures of participation in GVCs Conventional measures; ratios of export and import penetration. Problems; (1) Double Counting i.e. captures value of an intermediate more than once as it crosses international boundaries. (2) Exclusion of services What is needed?- Value added trade data for manufacturing and services. This study uses World Input- output database and Trade in Value Add (TiVA) database and new measures based on value- added.

6 Core Concepts/Measures FVA in output; value added import content of output Forward Linkages: DVA in exports of intermediate goods and services as a share of total gross exports Backward Linkages: FVA share of gross exports; value added import content of exports. Participation index: Backward Linkages + Forward Linkages

7 Contribution of the Study Empirically estimates a dynamic labour demand equation to examine effect of growth in FVA in output and linkages in GVCs on employment growth for Separately examines effects of Forward and Backward linkages using TiVA database Analysis includes Manufacturing sector, Services and Agriculture and Allied activities.

8 Why analyse services? GVCs in different sectors have different mixes of skilled and unskilled workers Baldwin s Smiley Curve (2012); higher value added and gains to pre and post manufacturing activities Important to separately examine Forward and Backward linkages; differential impact for different sectors.

9 Trends in Forward Linkages Growth of DVA share in exports of intermediate products has been negativefor many countries In India, the DVAshare fell by almost 15 percentage points from 1995 to !5!10!15!20!25!30!14.98 Growth-of-DVA-in-exports-1995!2011

10 Trends in Backward Linkages FVA share ingross exports hasincreased by 3% in Brazil, 0.46% in Russia, 14.7% in India and 6.3 % in South Africa China reports a fall of 1.2 %. 30 Growth+in+Backward+Linkages (%) !10!20

So Where Does India Stand? Country Participation in GVCs (%) Brunei Darussalam 92.91 Saudi Arabia 92.81 Malaysia 79.89 Singapore 79.71 South Africa 79.

11 So Where Does India Stand? Country Participation in GVCs (%) Brunei Darussalam Saudi Arabia Malaysia Singapore South Africa Indonesia United Kingdom Thailand Brazil Japan Viet Nam China India France United States 67.34

12 Alternative Participation index? Country s backward and forward linkages as a share of global backward and forward linkages (Banga 2013) Country Participation in GVC (%) China 9.63 United States 9.04 Germany 7.30 Japan 4.50 United Kingdom 3.82 United States, United Kingdoms, France, Germany more linked into value chains than India, Malaysia, Indonesia and Brazil. France 3.39 Saudi Arabia 2.38 India 2.22 Singapore 1.55 Brazil 1.50 Malaysia 1.49 Thailand 1.29 Indonesia 1.19 Hong Kong, China 0.58 Brunei Darussalam 0.08

13 Has India gained? Depends on how participationis defined Ratio of forward linkages to backward linkages; ratio less than one indicating a net loss in terms of domestic value added in exports (Banga,2013). Falling ratio for India in the period Ratio of Forward to Backward linkage for India Type of linkage Forward Backward Ratio

14 Value Added Sectoral Trends DVA in Exports of Intermediate Products/Forward Linkages 70 % % 43% 41% 59% 52% 37% C01T05:.Agriculture,.hunting,. forestry.and.fishing C15T37:.Total.Manufactures C50T95:.Memorandum.item:. Total.Services % FVA Share in Exports/ Backward Linkages 13% 6% 36% 12% 5 3% 4% C01T05:+Agriculture,+ hunting,+ forestry+and+ fishing C15T37:+Total+ Manufactures C50T95:+Memorandum+ item:+total+services

15 Value added by services Foreign(Services(value(added(share(in( gross(exports Domestic Services value added share in gross exports Industry/(Mining,/ Manufactures/and/ Utilities) Total/Services/ 0 Industry (Mining, Manufactures and Utilities) Total Services

16 Backward Linkages in Business Services R&D,and,other,business,activities Computer,and,related,activities Renting,of,machinery,and,equipment Real,estate,activities Financial,intermediation Post,and,telecommunications Transport,and,storage Hotels,and,restaurants Wholesale,and,retail,trade

17 Sectoral Employment Large informal sector Sectoral shares,in,total,employment 70 Labour market rigidities In the period ; 7% increase in employment in service sector, 1% increase in manufacturing and a 4% increase in construction, quarrying and mining. % Agriculture Construction,7 Mining7and7 Quarying Manufacturing Services 2011

18 Data Sources 1. World Input- output Database; 35 industries; 16 manufacturing and 14 services for Ø Data on share of FVA in output: WIOT 2. TiVA; 26 industries matched to WIOD for discrete years in the period Ø Data on FVA in gross exports and DVA in exports of intermediates

19 Labour Demand Equation Derivation of the empirical model closely follows Greenway et al (1998) and Hasan et al (2007) Cobb Douglas production function; Q it = A γ K α it Lβ it General dynamic labour demand equation: LnL it = λ i ϕ 0 T ϕ 1 j LnM i,t j ϕ 2 j LnX i,t j + χ 0 j LnL i,t j + χ 1 j Lnω i,t j + χ 2 j LnQ i,t j + e it j j Backward (Forward) Linkage instead of import (export) penetration j j j

20 Methodology GMM models; Ø Captures the dynamic nature of trade by including lags on the dependent variables Ø Deals with problem of endogenous covariates and fixed effects using lags of endogenous covariates Xtabond2: gives the Windmeijer (2005) finite - sample correction for the two step robust covariance matrix Standard autocorrelation tests and Hansen s tests of over identifying restrictions for validity of GMM estimation Standard errors clustered over industries

21 MODEL Empirical Results; ASI and WIOD FIXED EFFECTS (1) FIXED EFFECTS (2) RANDOM EFFECTS Diff-GMM (4) Diff-GMM (5) Ln 0.84*** 0.90*** (Employment(-1)) Ln 0.49** 0.52** 0.54*** 0.11** 0.10** (GVA) (2.44) (2.27) (2.78) (2.03) (2.07) Ln -0.15** *** -0.11** -0.09*** (wagerate) (-2.09) (-1.07) (-2.48) (-2.55) (-2.62) Ln ** (tariffs) (-0.69) (-2.03) (-1.57) Ln -0.02*** -0.02** (FVA in output) (-2.69) (-2.20) Ln (FVA*sectordum) (-0.23) HS share in compensation (-1.15) Observations Number of industries R squared AR(2) Hansen p-value Standard errors Cluster robust Cluster robust Cluster robust Two-step cluster robust Two-step cluster robust Note: (*) significant at 10%, (**) at 5% and (***) at 1%, time and industry dummies used but coefficients not reported

22 Main Findings Growth in GVA is positively associated with growth of employment Higher the growth in wagerate, lower the growth of employment Growth in share of FVA in output implies lower growth of employment Net effect of increasing foreign value added in output on employmentgrowth in negative; substitution effectof trade is dominating

23 Empirical results; TiVA and WIOD MODEL Ln(employ(-1)) Ln(GVA) Ln(Wagerate) BL FL DIFF-GMM (1) 0.36 (1.23) 0.38** (2.45) -0.4*** (-2.75) -0.01** (-2.35) DIFF-GMM (2) 0.23 (1.01) 0.4*** (2.65) -0.48*** (-3.83) -0.01** (-2.37) DIFF-GMM (3) 0.01 (0.05) 0.53*** (4.22) -0.55*** (-4.75) (0.47) DIFF-GMM (4) (0.08) 0.55*** (5.32) -0.54*** (-5.51) (0.91) BL*sectordum 0.02*** (3.06) FL*sectordum (1.26) No. of Obv P value at AR(2) No. of lags used Hansen s test p -value Standard errors Two- step robust Two- step robust Two- step robust Two- step robust year dummy yes yes yes yes sectordum No Yes No Yes Note: (*) significant at 10%, (**) at 5% and (***) at 1%, time and industry dummies used but coefficients not reported

24 Main Findings Higher Backward Linkages impact employment growth negatively Negative effect of Backward Linkages more in non- manufacturing sector Forward Linkages do not have a statistically significant impact on growth of employment in India Kind of forward linkages created have not been able to boost employment growth

25 Policy Implications Ø Tailor policies to encourage Backward Linkages complementary to existing domestic production. Substitution or scale effect?- Analyzing comparative advantage of all nodes Ø Increase contribution of domestic services to gross exports of manufacturing and agriculture. Diagonal integration; higher value addition activities Use domestic supply chain services to capture more rents

26 Policy Implications and Scope Ø Focus on boosting exports in in higher value added activities; research and designing, branding, marketing etc. Scope for Economic and social upgrading Ø Role of FDI in Global Value Chains What kind of FDI and where? Spillovereffects of joint ventures? Ø Changes in labour force; wage differentials between skilled and unskilled workers; labour productivity.

Impact of Linking into Global Value Chains on Indian Employment

Impact of Linking into Global Value Chains on Indian Employment Karishma Banga January 2017 CEP Working Paper 2017/1 ABOUT THE AUTHOR Karishma Banga is a PhD student at the Global Development Institute,