Global value chains and aggregate productivity growth in developing countries: the role of intra-sectoral allocation and structural change

Participation in global value chains (GVC) has recently been highlighted as a pathway to fast-track development in productivity growth through productive and allocative efficiency, particularly in Africa and other developing countries where structural change has stalled. This paper investigates how participation in GVC affects aggregate labor productivity growth. It further quantifies how the aggregate labor productivity growth effects of GVC are distributed among the sub-components-within (intra-sector) effect and structural change (inter-sector) effect. Using data for a sample of 46 developing countries and utilizing panel fixed-effect and instrumental variable estimations, the study finds that participation in GVC has a positive and significant effect on aggregate labor productivity growth in developing countries. These benefits arise in all countries in the study sample including those in Africa but most strongly in countries in Asia and Latin America. This is regardless of whether countries are integrated into GVC through backward or forward participation, however, with a relatively stronger positive effect through forward participation. The results from the analysis of the two sub-components of aggregate labor productivity growth show that GVC participation has a positive and significant effect on the within component by inducing an efficient reallocation of resources within but not across sectors.