BOK Economic Research
The Impact of Global Value Chain (GVC) Changes on Economic Growth
[Asia Economy Reporter Kim Eunbyeol] In a situation where the Global Value Chain (GVC) is weakening, it has been found that South Korea gains significant economic growth effects by exporting intermediate goods such as materials and components. The economic effect was greater when exporting intermediate goods to developing countries rather than advanced countries. Given the recent weakening of the GVC due to protectionism in various countries and the COVID-19 pandemic, this is a point that South Korea's export manufacturing industries should consider.
According to the 'BOK Economic Research' published on the 1st by Choi Moonjung, Associate Research Fellow at the Bank of Korea's International Economic Research Department, and Kim Sewan, professor at Ewha Womans University, it is estimated that after the financial crisis, when the forward participation rate in the GVC targeting developing countries grows by 1 percentage point, the economic growth rate increases by about 0.024 percentage points. This differs from the pre-crisis period when forward participation targeting developing countries had a negative effect on the growth rate.
Forward participation in the GVC refers to producing and exporting intermediate goods such as parts used in other countries' exports. Processing and assembling imported intermediate goods for export is classified as backward participation.
In particular, in the manufacturing sector, forward participation was found to play a more positive role in economic growth than backward participation. Associate Research Fellow Choi stated, "This study suggests that forward participation through exporting high value-added materials and components is more important than backward participation through simple assembly in the GVC."
Since South Korea's economic structure is still concentrated on exports and manufacturing, the economic growth effect from service sector participation in the GVC appears to be small. A representative example of service sector GVC is the research and development (R&D) services provided by the United States' science and technology-related professional service industry to South Korea's computer and electronics industry, or technology-related services provided to the construction industry. This can be understood as exporting a country's service technology to another country through consulting and advisory services.
Primarily, advanced countries earn profits from service sector exports. This is why experts consistently point out that South Korea should increase the proportion of the service sector and also increase investment.
Meanwhile, this study estimated the impact of GVC participation on economic growth by utilizing global input-output table data and conducting inter-country panel analysis on 43 countries from 2000 to 2014.
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