JOURNAL OF ECONOMIC ISSUES
Vol. LI No. 2 June 2017
DOI 10.1080/00213624.2017.1320916
Inequality and Income Distribution in Global Value Chains
Carlos Aguiar de Medeiros and Nicholas Trebat
Abstract: Global value chains (GVCs), led by transnational corporations (TNCs),
have reshaped the world division of labor over the past two decades. GVCs are
pervasive in low technology manufacturing, such as textile and apparel, as well as in
more advanced industries like automobiles, electronics, and machines. This
hierarchical division of labor generates wild competition at the lower value-added
stages of production, where low wages and low profit margins prevail for workers
and contract manufacturers in developing countries. At the top of the hierarchy
another kind of competition prevails, centered on the ability to monitor and
control intellectual property rights related to innovation, finance, and marketing.
We argue that GVCs have had crucial effects on income inequality and the
appropriation of rents in modern capitalism.
Keywords: global value chains, inequality, intellectual property rights, rents
JEL Classification Codes: O13, O40, E6
Global value chains (GVCs), led by transnational corporations (TNCs), have reshaped
the world division of labor over the past two decades. The emergence of these vertical
production networks was made possible by progress in information and
communications technologies, extensive economic liberalization in developing
countries, and geopolitical shifts that vastly increased the size of the capitalist labor
force. GVCs are pervasive in low technology manufacturing, such as textile and
apparel, as well as in more advanced industries like automobiles, electronics, and
machines.
This hierarchical division of labor generates wild competition at the lower valueadded stages of production, where low wages and profit margins prevail for workers
and suppliers operating out of export processing zones in underdeveloped countries.
At the top of the hierarchy another kind of competition prevails, which is centered on
the ability to monitor and control intangible assets related to innovation, finance, and
marketing.
Carlos Aguiar de Medeiros is an associate professor in the Institute of Economics at the Federal University of Rio de
Janeiro (IE-UFRJ). Nicholas Trebat is an assistant professor at the same institution. Carlos Aguiar de Medeiros
gratefully acknowledges the financial support of Conselho Nacional de Pesquisa (CNPq).
401
©2017, Journal of Economic Issues / Association for Evolutionary Economics
Carlos Aguiar de Medeiros and Nicholas Trebat
402
Privatization, deregulation, and the enforcement of intellectual property rights
have been major features of the world economy since 1980, enlarging the economic
rents appropriated by financial interests, CEOs, and holders of patents and
copyrights. These features were closely related, supported the expansion of global
production networks, were commanded by TNCs from the advanced capitalist core,
and required both a weaker regulatory environment with regard to trade, investment,
and finance, and a stronger regulatory environment with regard to the protection of
extraordinary profits.
We organize this article into four sections. In the first section, we analyze
different concepts of rent in classical political economy and use them to introduce key
sources of rent in modern GVCs. In the next section, we discuss the rise of modern
production networks and argue that increased outsourcing, together with the
strengthening of IPR regimes worldwide, has enlarged rent appropriation for lead
firms in GVCs. In the third section, we examine income distribution within GVCs
and point to evidence suggesting that capital and high-skilled labor in wealthy
countries reap increasingly large shares of value added in world trade. In the final
section, we offer our conclusions.
Old and New Sources of Economic Rent
Classical political economy examined two basic forms of economic rent, understood
as the fraction of surplus appropriated by landowners. The first, emphasized by Adam
Smith and Karl Marx, originated from the power of landowners to charge producers
for the use of their land, resulting in prices that exceed production cost (which
includes the normal rate of profit). The second, associated with David Ricardo, arises
when two different productive techniques are simultaneously in use, but the normal
price is governed by the inferior technique. Both forms of rent originate from a
market price that exceeds production cost, but only the first — absolute rent, as Marx
(1991, 895) called it — is an independent source of price. It is a kind of monopoly
price,1 emerging when scarcity, natural or created through anti-competitive practices,
gives owners the power to fix price above production cost.
Marx (1982, 1991) regarded the search for extraordinary profits as the main
source of technical progress in capitalism. Although analytically similar to differential
rent, in Marx’s view, extraordinary profits were temporary phenomena that were
systematically destroyed by capitalist competition. Absolute rent, on the other hand, is
not a temporary phenomenon, and, unlike profits, served no technological or
productive purpose. It exists simply because owners of certain kinds of assets — land,
1
“The rent of land, therefore, considered as the price paid for the use of the land, is naturally a
monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement
of the land, or to what he can afford to take; but to what the farmer can afford to give” (Smith 1976, 161).
“The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price
of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but
for any considerable time together. The one is upon every occasion the highest which can be squeezed out
of the buyers, or which, it is supposed, they will consent to give. The other is the lowest which the sellers
can commonly afford to take, and at the same time continue their business” (Smith 1976, 78).
Inequality and Income Distribution in Global Value Chains
403
technology, finance, and CEO pay, for example — have the power to charge a price
above production cost. This kind of unearned income, Thorstein Veblen (1919, 76)
noted, “has some analogy with the phenomena of blackmail, ransom, and any similar
enterprise that aims to get something for nothing.” The distribution of surplus to
what Veblen called the “vested interests” of shareholders, monopolists, and rentiers is
a central feature of modern capitalism. Oligopolistic practices do not prevent
competition, but real competition among giant firms includes business strategies and
institutions to exploit rents through patents and copyrights, licenses, and proprietary
technology. In general, these firms seek to extend the commodity space and time
length for the appropriation of extraordinary profits and rents.2 This includes not
only traditional forms of rent like land, but also rents obtained through the provision
of services in computing, software, and finance.
Two sources of rents associated with services, finance, and intellectual property
rights (IPR), are particularly relevant to our analysis and we will discuss them in more
detail below. They did not emerge to stimulate innovation or solve productive
necessities, but to enlarge the value appropriated by transnational corporations
(TNCs) in an era of slower economic growth.
Globalization and Corporate Control of Economic Rents
Modern production is “splintered” into stages and tasks performed by international
networks of affiliates and independent suppliers (Nathan and Sarkar 2011). Among
other consequences, the intense division of labor, characterizing production within
GVCs, has reduced the bargaining power of labor in advanced capitalist nations. One
reason for this is greater competition from low wage workers in poorer countries like
China. Another has to do with subcontracting. Modern network firms rely on their
ability to outsource, one of the great advantages of which (from the perspective of
these firms) is that it allows them to more efficiently segment the labor market. A
drawback of the large integrated firms of the postwar era was that — although they had
substantial monopoly power — their employees could demand relatively high wages.
As direct employees, these workers could claim a share of the firm’s rents or
extraordinary profits. Borrowing from Michal Kalecki’s discussion of the effect of
monopoly power on wages, Dev Nathan and Sandip Sarkar (2011, 54) note that the
rent “earned by the integrated monopoly firm is likely to have an effect on wages in
the firm as a whole,” from assembly line workers to those with advanced degrees
doing R&D.
Rather than integrated firms, TNCs today are more often commanders of supply
chains focused on specific tasks like marketing and design, outsourcing most other
activities to independent suppliers. The key to this arrangement (and one of the main
sources of higher rents) is that the suppliers — usually contract manufacturers in
2
As Veblen recognized, innovation is a collective endeavor. Rather than a “creative achievement” of
self-sufficient individuals or firms, technical progress is a “joint possession of the community” (Veblen
1919, 57). This observation maintains relevance today, not least in the US, where new technologies are
largely the result of state funding and planning (Mazzucato 2014).
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Carlos Aguiar de Medeiros and Nicholas Trebat
developing countries — operate in much more competitive environments than the
lead firms themselves. The latter control intangible assets related to innovation and
branding, and are thus able to capture the lion’s share of rents.
Network production, however, also involves risks for TNCs: namely,
technological diffusion and competition from suppliers seeking to move up the value
chain. To combat these risks and increase rent appropriation, TNCs have sought to
strengthen and universalize patent and copyrights laws. In pharmaceuticals,
computers, and other high-tech industries, the “accumulation of private property
rights over intangible knowledge” (Pagano and Rossi 2011, 10) became a dominant
strategy after 1990. These industries took the lead in pressuring governments to put
IPR at the center of trade negotiations. The TRIPS agreement, signed in 1994,
established for the first time in modern history a set of enforceable, international IPR
standards, which included twenty-year patents in various technology fields and fiftyyear copyrights for most copyrightable material.
The strengthening of IPR laws increased rents in fields like entertainment,
pharmaceuticals, computer software, and high-tech industry in general. With regard
to pharmaceuticals, Dean Baker (2015) notes: “Drugs are an extreme case where the
patent monopoly rent is largely the price of the product.” Other notable sectors are
chemicals, biotechnology, and medical equipment.
Finance is another important source of rents in today’s global economy. Of
particular relevance to the discussion at hand is the proliferation of tax-avoidance
schemes, which is a direct result of financial deregulation, particularly the elimination
of capital controls worldwide. Firms like Apple and Boeing, aided by banks and
consulting firms, employ elaborate transfer pricing and debt financing schemes to
hide income in offshore tax havens and skirt tax obligations. Rather than repatriate
income held abroad, they use their immense “foreign” cash holdings to borrow
cheaply in financial markets, rewarding stockholders through share buybacks. The
United Nations Conference on Trade and Development (UNCTAD) (2015a) notes a
marked increase in the use of special purpose entities and offshore financial centers
(such as the British Virgin Islands) to shift profits from regions where production
actually takes place to low-tax jurisdictions. By the end of 2010, roughly 30 percent of
world cross-border investment flows had been routed through offshore hubs, up from
less than 20 percent at the start of the decade.
Citing the case of Google, which paid a tax rate of only 2.4 percent on its profits
outside of the United States in 2009, UNCTAD (2015a, 200) argues that transfer
pricing and debt financing schemes are widespread and result in fantastic gains for
TNCs. These tactics “artificially deflat[e] the average rate of return of foreign
investments,” thus reducing or entirely eliminating tax obligations in the firm’s
country of origin.
Developing countries, which participate in GVCs, are particularly vulnerable to
such tax avoidance schemes. UNCTAD (2015a, 203) estimates that $450 billion in
profits is shifted yearly from developing countries to offshore entities, leading to
revenue losses on the order of 10 percent of total tax payments made by foreign
affiliates in developing countries. Illegal flows, involving abusive transfer prices and
non-existent foreign loans, were particularly large out of Mexico and Costa Rica — two
Inequality and Income Distribution in Global Value Chains
405
of Latin America’s most active participants in GVCs. “In the cases of Costa Rica and
Mexico,” the UNCTAD study notes, “the large scale of illicit financial outflows is
related to these countries’ participation in global value chains.”3
Veblen’s concept of “goodwill” offers an interesting perspective on the
technological and financial rents, mentioned above. Veblen (1904) included in his
definition of goodwill “trademarks, brands, patent rights, copyrights,” as well as
intangible assets held by banks and financial interests. “All these items,” Giorgos
Argitis (2016, 841) notes, “provide a differential advantage to their owners, but they
are of no aggregate advantage to the community. They constitute wealth to the
individuals concerned (differential wealth), but they form no part in the wealth of
nations.”
The implications of this institutional evolution in mature capitalism for
developing economies (discussed in the next section) are vast. Historically, backward
economies nationalized and exerted control of economic rents in land, technology,
and finance for developmental or distributive purposes. In developmental states, these
rents were appropriated by domestic firms in industrial activities or were transferred
to social groups by public policies.4 Deregulation and privatization led to the
dissolution of these protectionist rents and their appropriation by transnational
corporations through market forces. The emergence of global, rules-based
organizations like the WTO and the internationalization of IPR law make
technological catch-up costlier and more difficult for developing countries. This is a
crucial development because — as Celso Furtado (1978, 152) noted decades ago —
“technological control is the bedrock of the international power structure. Reduced to
its ultimate consequences, the fight against dependence is an effort to nullify the
effects of the monopoly of this resource” by the advanced capitalist nations.
The new division of labor in global manufacturing, backed by an institutional
structure that reinforces the technological and financial power of large TNCs,
generates an uneven value distribution between activities (mainly in services) in which
economic rents are pervasive and activities (mainly in manufacturing) in which
competition is fierce. Although power asymmetries within GVCs are widely
recognized (Gereffi 2014; Milberg and Winkler 2013), current estimates of value
appropriation within GVCs cover only part of this process. As we argue in the next
section, hidden incomes in GVCs are pervasive.
Winners and Losers in GVCs
The world network trade is dominated by TNCs based in wealthy countries and
characterized by regional blocks centered on the US, Japan, Germany, and
3
Analyzing illegal trade invoicing in Latin America, United Nations Economic Commission for
Latin America and the Caribbean (UNECLAC) (2016, 125) observes: “[I]illicit financial flows have
increased sharply in the last decade, with outflows from trade misinvoicing rising by an average of some 9%
a year.”
4
Raphael Kaplinsky (1998) deals with competitive advantages, emerging from several sources of
economic rents that he examines (resource rents, policy rents, human resources rents, organizational rents,
relational rents, product and marketing rents, infrastructural rents, and finance rents).
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Carlos Aguiar de Medeiros and Nicholas Trebat
(increasingly) China. Describing the “technological asymmetry” within GVCs,
Richard Baldwin and Javier Lopez-Gonzalez (2013) argue that global production is
essentially divided into “headquarter” economies located in Japan and the west, and
“factory” economies located in Asia and Eastern Europe. While “firms in the
headquarter economies ... arrange the production networks; factory economies
provide the labor” (Baldwin and Lopez-Gonzalez 2013, 1696).
GVCs expanded rapidly after the year 2000, and this coincided with an increase
in the technological sophistication of developing countries’ exports. However, as
UNCTAD researchers pointed out in the early 2000s, this increasing sophistication
was largely a “statistical mirage” as it involved heavy reliance on imported inputs. In
most developing countries, “exports have increased substantially without having led to
comparable increases in DVA, therefore weakening the production-linked gains
commonly expected with export-led growth” (UNCTAD 2015b, 30).5 Wealthy
countries retain much larger shares of their gross exports in the form of domestic
value added than the poorer “factory” economies. In 2011, the foreign value-added
(FVA) share in gross exports for the United States, United Kingdom, Germany,
Japan, and France ranged between 15 and 25 percent, compared to 35-45 percent in
Eastern Europe and Southeast Asia.6
Given these trends, it is perhaps not surprising that GVC income since the
mid-1990s has been increasingly skewed in favor of capital and high-wage earners in
wealthy countries.7 Marcel Timmer et al. (2014, 104-110) find that the share of value
added accruing to capital increased between 1995 and 2011 in almost two-thirds of
the over 500 value chains covered in their study. The value-added share of high-skilled
workers, which includes managers and CEOs, increased in 92 percent of the chains,
while the low-skilled labor share fell in an astounding 91 percent of the chains. In
terms of gains by factor groups, high-skilled laborers in wealthy countries were the
biggest winners, with a positive increase of 5.0 percent. The biggest losers were
low-skilled workers in developing countries, whose share in value added fell by 6.3
percent, the largest variation (positive or negative) among all factor groups analyzed.
Over half (55 percent) of value added generated within GVCs accrues to just
twenty-one high-income countries: the United States, Japan, South Korea, Taiwan,
Australia, Canada, and the fifteen pre-2004 members of the European Union
(Timmer et al. 2014, 110). Although significant, this result is below estimates based
on data supplied by the Organization for Economic Cooperation and Development
(OECD), and well below Rashmi Banga’s (2014, 278) estimate of 67 percent accruing
to OECD countries.
5
In the 1970s, South Korea’s export share of GDP was similar to that of Malaysia and Thailand
today, but the domestic value-added (DVA) share of its gross exports was well over 75 percent, much higher
than any Southeast Asian country today. Between 1995 and 2011, the domestic value added (DVA) share
of gross exports fell in every Asian country, except the Philippines and Indonesia.
6
Results based on our analysis of the OECD-WTO’s database on Trade in Value Added (OECDTiVA).
7
The World Input-Output Database project (WIOD), funded by the European Commission, along
with the OECD-WTO’s database on Trade in Value Added (OECD-TiVA), are the main sources of data
value added in GVCs. Other databases exist, but are either not publicly available, or provide data for a
limited set of countries.
Inequality and Income Distribution in Global Value Chains
407
Timmer et al.’s calculations, however, likely underestimate the share of GVC
income appropriated by wealthy countries. First, the study is restricted to
manufactured goods, and thus does not analyze income distribution within value
chains for services or agricultural commodities like coffee and chocolate, in which
retailers from wealthy countries earn most of the value added. Second, the national
accounts data used to estimate GVC income only tracks payments for produced
assets, ignoring certain types of income related to the use of intellectual property.
Third, value-added trade data use basic or ex-factory gate prices for final products in
manufacturing, excluding distribution and retail margins. The problem with this is
that much of the income earned within GVCs surfaces only in the retail stage of the
value chain, where lead firms often exercise strict control and obtain large premiums
on sales to consumers. For brands like Apple, profits reflect control over intangible
assets related to product design and technology, and “the use of these intangibles is
typically not compensated for by a direct money flow from the users” (Timmer et al.
2015, 593). Finally, and perhaps most importantly, value-added trade data are
compiled on a domestic rather than national basis, meaning that if a French
multinational operating in Vietnam exports a machine to Japan, the capital income is
credited entirely to Vietnam, not France. Given that foreign direct investment (FDI)
stocks and income are overwhelmingly from high-income countries, estimates of value
-added trade on a domestic basis will inflate the developing world’s share.8
Measures to improve data collection, such as including estimates for FDI
income, will not necessarily solve these problems. As we noted above, TNCs often
hide foreign income for tax purposes and avoid repatriation to their countries of
origin. These hidden incomes will not appear in FDI data, obscuring the extent to
which the gains from global trade are lopsided in favor of wealthy countries.
Conclusion
The ability of big business to extract technological and financial rents — to “get
something for nothing,” as Veblen put it — explains much of the social and economic
polarization of modern capitalism. The rise of GVCs, led by a select group of
powerful corporations, has created a vast and unequal international division of labor
that divides the world into “headquarter” economies located in Japan and the west
and “factory” economies located in Southeast Asia, Eastern Europe, and Latin
America (Baldwin and Lopez-Gonzalez 2013). Tangible activity (mostly in
manufacturing and assembly) takes place in developing countries, while intangible
intellectual work (mainly in services, such as R&D, design, finance, and marketing) is
concentrated in wealthy countries. The “core business” of every TNC, irrespective of
its particular branch, is to control and capitalize on these intangible assets.
8
Jason Dedrick, Kenneth L. Kraemer, and Greg Linden (2010) take the opposite (and arguably more
realistic) approach in their well-known study of the iPod and iPhone supply chains (crediting income to the
country of origin of multinational firms), leading them to conclude that China retains almost none of the
value added created in these chains, even though Chinese workers provide almost all of the labor.
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Carlos Aguiar de Medeiros and Nicholas Trebat
The legislative and institutional changes, associated with globalized trade and
finance, have increased corporate mobility in two key ways. First, they have made it
easier for firms to outsource activities and relocate facilities to lower-wage areas,
putting downward pressure on wages in their countries of origin. Second, they have
made it easier for firms to transfer funds around the world and shift accounting
profits to low-tax jurisdictions. This increased mobility has enlarged rents for large
firms and helped redistribute income along the value chain from productive workers
to shareholders and salaried executives.
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