NOTES ON GLOBAL VALUE CHAINS AND OTHER METHODOLOGICAL ISSUES
Table of Contents
1.
2.
3.
4.
Global Value Chains
Law of one price in “vertical” transactions along the value chain
An alternative protection indicator derived from the PAM
Additional development indicators
1. Global Value Chains

The aim of this section of the methodology should be to identify a rigorous way to
monitor how what happens in the “beyond the border” stages of the value chain, affects
agents operating “within the border”.

Examples of GVC studies focusing on different issues can be provided (could be part of
the Synthesis)

We recall from the methodology paper, that assuming the small country hypothesis, the
domestic market retail price of an imported commodity is:
Pdr  Pdw  Twr0  Twr1  R fr
where Pdr is the domestic market price, Pdw is the world price Twr0 is the efficient component
of costs incurred in to take the commodity from the wholesale market to the retail market
and Twr1 represents “excessive” costs incurred in to take the commodity from the wholesale
market to the retail market.
0
1
 Tbw
Since Pdw  Pb  1  t   Tbw
(we assume an ad valorem tariff on imports and define “t”
as the rate of import tariff), it is possible to write the previous expression as:
1
Pdr  Pb  1  t   Tbw0  Twr0  Tbw
 Twf1  R fr
Consider now a commodity that is exported from a MAFAP country and sold to a “developed
market economy”, i.e. a European country. The last stage of the (global) value chain of that
commodity is therefore the retail market in the recipient (importing) country. If we assume
the small country hypothesis and ad valorem import tariff, we can define the domestic
market price at the retail level in the importing country (“consuming country” henceforth) as:
1
P r ccd  Pw  1  t   Tbw0  Twr0  Tbw
 Twf1  R fr
However, since the consuming country is a “developed market economy”, there won’t be
“excessive” costs stemming from lack of infrastructures. Hence, the domestic market price
at the retail level in the importing country boils down to:
P r ccd  Pw  1  t   Tbw0  Twr0  R fr
Given that the efficiency transport costs are known, we can obtain a measure of rents by
subtracting the ad valorem tariff and efficiency transport costs from the observed retail
domestic market price:
R fr  P r ccd  Pw  1  t   Tbw0  Twr0
2. Law of one price in “vertical” transactions along the value chain
One of the fundamental assumptions underneath the law of one price is homogeneity (or
perfect substitutability) of goods.1
This means that when we apply it “vertically”, we are making the implicit assumption of no
heavy processing along the value chain. In other words, we assume that from one stage to
the next, commodities stay more or less unchanged.
It is because of this assumption that we can define the price at one stage of the value chain
as the price at the upstream stage plus an adjustment factor (transport/transaction costs,
1
rents, etc) (for example: Pdr  Pdw  Twr0  Twr
 R fr ).
Releasing the homogeneity assumption implies that the price at each stage of the value
chain is:
Pdi  MC i
This holds if markets are competitive (each firm produces the quantity of output that allows it
to set its marginal cost of production equal to the output market price, which is a given). For
different market structures, different pricing mechanisms will hold.
Thus, in order to capture rents along value chains of highly processed commodities, relying
on the output side only is not enough. It proves instead essential to study the market
structure and the production costs structure of each stage of the chain (=include input side).
3. An alternative protection indicator derived from the PAM
In a previous note, we showed that when data on transaction costs are available and thus it
is possible to avoid making use of pass-through assumptions, “regular” PAM/VCA
protection/competitiveness indicators may fail to capture how changes in the protection over
one agent of the value chain spread over upstream/downstream agents.
The example given in the previous note considered a sugarcane and a sugar producer and
illustrated that if for some reason the sugarcane producer is able to sell its output to the
sugar producer at a higher price (thus reducing the supernormal profits that the sugar
producer is making because of the policies in place/ existing market distortions) the Effective
Protection Coefficient (EPC) of the sugarcane producer increases, while the EPC of the
sugar producer stays unchanged:
When commodities are close to identical (perfect substitutes) people in the economy may
take advantage of any price differentials (arbitrage) by buying where the commodity is
cheaper and sell it where its market price is higher. This will eventually bring one only price
to prevail in the different markets.
1
Figure 1: Effective Protection Coefficient in two scenarios
SUGARCANE
PRODUCER
SUGAR
PRODUCER
CONSOLIDATED
VALUE CHAIN
BASELINE SCENARIO
1.29
1.37
1.37
ALTERNATIVESCENARIO-1
1.43
1.37
1.37
Here we propose a different indicator that seems to give a better account of how changes in
the protection over one agent of the value chain spread over upstream/downstream agents.
Let’s first of all recall the basic structure of a PAM:
Figure 2: Basic PAM
COSTS
Tradable Inputs
REVENUES
Domestic
Factors &
Not traded inputs
PROFITS
Market Prices
A
B
C
D
Social
Prices
E
F
G
H
Gap
I
J
K
L
We use the example presented in the previous note, where for each scenario the PAM of the
two agents (sugarcane producer and sugar producer) were:
Figure 3: Policy Analysis Matrix -baseline situation
A. Sugarcane producer
REVENUES
COSTS
Tradable
Domestic
Inputs
Factors &
Not traded
inputs
B. Sugar producer
COSTS
PROFITS
REVENUES
Tradable
Inputs
Domestic
PROFITS
Factors &
Not traded inputs
Market
Prices
120
30
80
10
Market
Prices
1000
200+30=
230
500+80+10=
590
180
Social
Prices
110
40
70
0
Social
Prices
800
200+40=
240
500+70=
570
-10
Gap
10
-10
10
10
Gap
200
-10
20
190
Figure 4: Policy Analysis Matrix –alternative scenario
A. Sugarcane producer
REVENUES
COSTS
Tradable
Domestic
Inputs
Factors &
Not traded
inputs
B. Sugar producer
COSTS
PROFITS
REVENUES
Tradable
Inputs
Domestic
PROFITS
Factors &
Not traded inputs
Market
Prices
130
30
80
20
Market
Prices
1000
200+30=
230
500+80+20=
590
170
Social
Prices
110
40
70
0
Social
Prices
800
200+40=
240
500+70=
570
-10
Gap
20
-10
10
20
Gap
200
-10
30
180
Now, we build an indicator that is the ratio between the revenues at market prices over the
costs at market prices and the revenues at social prices over the costs at social prices.
Following the notation in figure 2, this indicator (I) can be defined as:
I
A
E

BC F G
Computing this indicator for the two agents in the two scenarios gives:
Figure 5: The “I” indicator in the two scenarios (change in market price)
SUGARCANE PRODUCER
Baseline scenario
Alternative Scenario
A/B+C
E/F+G
I
1.09
1
1.09
1.18
1
1.18
SUGAR PRODUCER
Baseline scenario
Alternative
Scenario
1.21
1.20
0.98
0.98
1.23
1.20
As shown by Figure 5, the “I” indicator in the alternative scenario increases for the sugarcane
producer and decreases for the sugar producer, thus capturing that the supernormal profits
of the sugarcane producer increase at the expenses of the supernormal profits of the sugar
producer.
The structure of the “I” indicator (you must have figured out by now that I really don’t know
what to call it) also allows to capture changes in the social prices of commodities.
Let’s use an example. This time we assume that not only is the sugarcane producer able to
sell its output to the sugar producer at a higher price (i.e., 130 as opposed to 120), but that
also the value that the whole society attaches to sugarcane increases (from 110 to 130).
Computing the “I” indicator gives:
Figure 5: The “I” indicator in the two scenarios (change in market price and social price)
SUGARCANE PRODUCER
Baseline scenario
Alternative Scenario
A/B+C
E/F+G
I
1.09
1
1.09
1.18
1.18
1
SUGAR PRODUCER
Baseline scenario
Alternative
Scenario
1.21
1.20
0.98
0.96
1.23
1.26
In the alternative scenario the sugarcane producer sells its output to a price that is equal to
its social value. Therefore, the “I” indicator (which doesn’t distinguish between changes in
protection and changes in market failures) signals that the effect of protection/market
imperfections has been eliminated (=1). (See Figure 6).
The result for the sugar producer is harder to interpret, as we would expect a reduction in the
“I” indicator (the sugar producer is now paying the “real economic value” of its input sugar).
However, since this translates into increased production costs, the “I” indicator increases.
4. Additional development indicators
Some ideas that maybe were already in but not made explicit:
 Agricultural value added
 Per capita GDP
 Population growth rate
 Agricultural Land per worker
 Farming systems (smallholder or estate production?)
 Changes in crop mix, in production and export
 Change in market position
 Depletion of natural resources