Global Value Chain Participation and Income Inequality:Implications...
Title:Global Value Chain Participation and Income Inequality:Implications for China’s Common Prosperity Policy
Author:YU Jiantuo XU Xiaolong
Since the 1980s，due to rapid growth in cross-border trade and investment，along with the advancement of information and communication technologies and reduction of transportation costs，global trade patterns have been largely changed. With rising vertical specialization and intra-industry trade，the global production network has been dramatically expanded，involving more economies and producers in value creation and distribution. The expansion of the global value chain in the golden age of globalization has made a substantial contribution to the overall economic growth of the world.
China has benefited greatly from the engagement in the global value chain over the past four decades. Owing to the reform and opening-up policy，China has been deeply integrated into the global economy and emerged as a systematically important player in global trade. Nowadays，China is the largest trading partner of more than 120 economies around the world. According to the General Administration of Customs of PRC，in 2021，the total volume of China's imports and exports exceeded US$6 trillion. In addition，according to data released by the United Nations Conference on Trade and Development (UNCTAD)，China is also one of the largest FDI recipients and OFDI providers. In 2021，the value of FDI inflows to China reached approximately US$181 billion，and China’s FDI outflows amounted to US$145 billion，both ranked second in the world. Benefiting from increasing economic integration with the global economy，China has been one of the most successful countries in economic growth in the past four decades，with GDP per capita rising from about US$155 in 1980 to US$12,551 in 2021.
However，the benefits of participation in global value chains are universal but uneven. China has experienced a widening income gap，and the Gini coefficient of household income rising from less than 0.30 at the beginning of the reform period to 0.495 in 2009. The income inequality in China has declined slowly since 2009，and the Gini coefficient of household income was 0.466 by the end of 2021. In order to improve the inclusiveness of economic development，the Chinese government has promoted the initiative of common prosperity in recent years.
According to official statistics，about 180 million people in China work in trade-related sectors. Hence studying the distributional impact of global value chain (GVC) participation has significant policy implications for China’s common prosperity agenda.
The relationship between trade and income distribution is a lasting theme in economic studies，but analysis based on GVCs may provide new insights into the debate in this area. Thanks to the advancement of global value chain measurement in the last decade，the value added datasets based on the input-output framework have become increasingly abundant，and many leading international organizations such as WTO and OECD，UNCTAD and ADB have carried out value added trade statistics studies，allowing more direct analysis on the benefits of GVC participation and its distributional effects.
Using updated OECD database，together with many other datasets of international organizations，the China Development Research Foundation team analyzes the impact of GVC participation on aggregate income distribution and whether such distributional impact differs in economies with different income levels. The findings of these studies provides some interesting insights for China’s efforts in strengthening its position in global value chain and pursue of the common prosperity goal.
Trends in GVC Participation and Income Inequality
The impact of GVC participation on domestic income distribution，to some extent，depends on an economy's position in the value chain，which affects its coordination and control of the value chain，hence affects its ability of value capture. Scholars have developed forward and backward GVC participation indices，with the former measuring the domestic value added generated from GVC production and trade activities as a share of total sector value added，while the latter measuring the percentage of a country’s final goods production contributed by both domestic and foreign factors that involve cross-country production sharing activities. The forward and backward value chain participation can jointly portray a country's value chain participation characteristics. A higher level of forward value chain participation indicates that a country has a greater ability to capture value in its foreign exports，which is more beneficial to its medium and high labor skills; a higher level of backward value chain participation indicates that a country is more dependent on other countries' trade in intermediate goods in GVC activities. A higher degree of forward participation than backward participation indicates that the country is more actively engaged in upstream production activities in value chains.
The OECD Dataset 2021 provides GVC participation indices for 65 economies during 1995 to 2018. According to this Dataset，it could be found that global value chain activity was generally on the rise during 1995-2018，but there were significant fluctuations. Over the period 1995 to 2018，the average forward participation index for the sample economies increased from 0.1404 to 0.1850 and the average backward participation index increased from 0.1493 to 0.1845，by 31.70% and 23.59% respectively. As found in Figure 1a，GVC participation in the sample economies，either forward or backward，showed a relatively steady increase until 2009，although there was a small drop during the Asian financial crisis and the shock caused by the bursting of the Internet bubble in 2001. The outbreak of the global financial and economic crisis in 2009 brought about a significant decline in GVC activity. Since then，GVC activity has recovered，but there has been a slow decline again since 2012，with a small rebound after 2016.
Trends in forward and backward participation are basically similar，but in most cases the degree of the latter is higher than the former. However，developed and developing economies show different patterns in value chain participation，with forward and backward value chain participation increasing by 24.96% and 22.68% respectively in developed economies and by 38.70% and 24.48% respectively in developing economies. Figure 1b and Figure 1c also reflect the patterns of participation of GVCs in developed and developing economies. In general，developed economies on average have higher GVC participation level during the investigation period，while value chain participation in developing economies was more dominant during the same period.