Sunday, December 11, 2016

SMEs Boost Trade and Mitigate Inequality

Chi-Jen Yeh

Inequality is a global phenomenon

     In most advanced and emerging markets and developing countries (EMDCs) the inequality has increased. The widening income inequality is considered as the "defining challenge of our time" in eyes of President Obama. A recent survey1 found that the gap between the rich and the poor is considered a major challenge by more than 60 percent of respondents worldwide.

Income inequality can be a signal of lack of income mobility and opportunity, a reflection of persistent disadvantage for particular segments of the society.

     As the IMF study2 shown that higher net Gini coefficient (a measure of inequality that nets out taxes and transfers) is associated with lower GDP growth over the medium term. The statistical results of the IMF report suggest that if the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage points lower in the following five years, implying that the benefits do not trickle down.

     As a matter of fact, the inequality not only dampens investment and GDP growth, but also fueling economic, social and political instability.

Globalization and the concentration of wealth

     Since establishment of WTO, the World experienced a rather high-speed economic growth for decades that creates prosperity, jobs and GDP growth that we all enjoy today. Such globalization process also made rooms for multinational enterprises (MNEs) to growth. In fact, MNEs played a more and more important role in the world trade system, which placed the micro- small-medium-sized-enterprises (MSMEs) in a less favorable position.

     For majority of MNEs come from advanced economies, the increasing difference in profitability between multinationals and MSMEs implying an increase in difference in GDP growth rate between advanced economies and the rest of the World. Consequently, the global wealth gradually concentrated to the MNEs and to the advanced economies as well, while the inequality is also observed in domestic economy. The observed dispersion of unequal income distribution is increasing and prevailing locally as well as globally.

 De-globalization: A serious concern
     Anti-globalization is regarded as public depression which origins from inequality of income distribution. However, the emerging of "de- globalization" phenomenon would be a true worry that the world trade grew in a rate that is lagged behind the averaged GDP growth rate of the World. Partly because of the "re-industrialization" of major advanced economies  while some other believe it is related to Non-Tariff Measures.       
     Nonetheless, a serious concern is "how we should react to this de- globalization phenomenon if it is not rooted in institutional behavior but in endogenous market force?" If we continue ignoring the unequal distribution of income and wealth, and fail to make the middle class being beneficial from globalization, we are encouraging at the same time the de-globalization and give stronger support to its argument. The inequality fosters labor's anger, which might help to accelerate the realization of eventual de-globalization.
Make  SMEs  integrated  into  GVCs  and  favorable  for globalization

      If the phenomenon of de-globalization is correlated to increase in intra-firm trade of multinationals, then corresponding policy response to de-globalization is probably to encourage MSMEs to integrate into globalization. On the one hand, this will help to boost trade volume of the World, and make MSMEs eligible to enjoy the benefits of globalization, on the other. Therefore, to assist MSMEs integrated into Global Value Chains as reiterated by APEC, so as to reduce the inequality of income distribution, is then a more than important mission that makes sense to all.
Digital trade and SMEs
     Digital trade could be an ideal vehicle to insert SMEs into globalization. Transactions through the channel of e-commerce save considerable costs for SMEs in advertising, establishing foreign affiliates and sales channels and avoiding unexpected expenses in cross-border management. Trade online enables smaller firms to manage transnational business like their big counterparts.
     In short, digital trade makes SMEs more efficient and more capable in global competition. Knowing that in most economies, ninety percent of firms are small in size and the SMEs create most of the jobs in domestic labor market. Successfully integrate SMEs into the global market implying the integration of local labors into the Global Value Chains in a large scale. While SMEs are able to lever up profits from the globalization, such benefits will trickle down to the local labors worked closely with the SMEs. Globalization enjoy by SMEs has tremendous meaning for stabilization in economy, in society and in politics.
Taiwan's experiences on SMEs along economic growth

     Incorporate with recently developed digital trade evolution and Taiwan's 50-year economic development experiences, we target to successfully achieve both economic growth and income distribution in a more equal way. Taiwan is keen on sharing these experiences and practical strategies with all member economies on promoting MSMEs to internationalize their businesses. With a hope that we will achieve a rather high economic growth and the fruits of free trade and investment will be shared to all people in the APEC region in a more equal way.
(Dr. Chi-Jen Yeh is an Associate Research Fellow of TIER)
1 Pew Research Center survey, 2014, "Emerging and developing economies much more optimistic than rich countries about the future." Washington.
2 IMF, 2015, Causes and Consequences of Income Inequality: A Global Perspective.



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