New winds blowing through world trade

How can trade replace aid in getting countries out of poverty?

That’s the question at the core of my research into why some countries shoot up the development ladder while others remain stuck at the bottom for decades.

Economists have spent years trying to understand why. We know institutions matter. We know human capital matters. We know investment, innovation, trade and governance all play important roles.  

But there is another question that has received far less attention.

How is the organisation of the economy different in countries that successfully move to the next income level?

And looking at the granular details, how do they participate in the global value chains where wealth is created? How strong are the links between domestic firms? Do they maximise value creation? And do these characteristics change as countries move from low income to middle income and eventually to high income?

These questions formed the basis of my recent research using OECD Trade in Value Added (TiVA) data that I presented at the 32^nd International Input Output Association (IIOA) last week in Seville, Spain (The 32nd IIOA conference - Abstracts and Papers).

Rather than asking what drives economic growth in general, I examined countries that successfully transitioned between World Bank income groups between 1995 and 2022 and compared them with countries that remained in the same income category. The objective was to identify whether successful transitions were consistently associated with particular patterns in the organisation of production and participation in global value chains.

The answer was yes. More importantly, those patterns changed systematically depending on a country’s stage of development.

Size isn’t everything

Traditional trade statistics tell us what countries export. But we have to look beyond trade volumes.

Trade in Value Added tells us what value those exports accrue to the domestic economy.

Two countries can export exactly the same products and the same value of exports while contributing very different amounts of domestic value to those products.

One economy may import most intermediate inputs, assemble the final product and export it. Another may manufacture components domestically, rely on extensive local supplier networks and embed engineering, logistics, finance and other services throughout production.

To conventional trade statistics, these economies look similar.

To Trade in Value Added, they look completely different.

This is important because economic development is not simply about exporting more. It is about increasing the amount of value created and retained within the domestic economy.

Development has different structural milestones

One of the strongest findings from the research is that countries do not simply become richer by doing “more” of the same things. Instead, countries that successfully upgraded consistently exhibited different structural characteristics depending on where they were on the income ladder.

In effect, successful development appears to involve reaching a series of stage-specific structural milestones.

Low-income countries: Building manufacturing capability

For countries moving from low-income to lower-middle-income status, successful transitions were consistently associated with deeper participation in manufacturing global value chains.

But participation alone was not enough. Countries were also characterised by stronger domestic production linkages. They were better able to connect local firms into production processes, creating domestic spillovers alongside international integration.

This finding challenges the idea that importing intermediate goods simply replaces domestic production. Instead, the evidence suggests that successful countries use imported inputs to upgrade production, learn new technologies and gradually build domestic capabilities that support higher-value exports.

In other words, the goal is not simply to export more—it is to build an economy capable of both creating and capturing value in production chains.

Lower-middle-income countries: deepening the economy

The next transition proved considerably more complex. No single indicator that I examined for my Trade in Added Value work clearly separated countries that upgraded from those that did not. Instead, successful economies appeared to strengthen several dimensions simultaneously: domestic demand linkages, services, production depth and broader economic integration.

This suggests that once basic industrialisation has taken place, development becomes less about one transformational change and more about deepening and strengthening the wider production system.

Upper-middle-income countries: moving into higher-value activities

The structural milestones change again for countries approaching high-income status. At this stage, manufacturing remains important, but it is no longer the defining feature.

Instead, successful countries consistently exhibited greater services value embedded in their exports.

These are not simply traditional service industries. They include engineering, research and development, finance, logistics, digital technologies, design and other knowledge-intensive activities that increasingly determine where value is created within global value chains.

This suggests that countries should not attempt to skip directly from low-income manufacturing to services-led development. Rather, the evidence points to a sequence of structural upgrading, where each stage builds the capabilities needed for the next.

Resources can still curse

The research also revisited one of the oldest debates in development economics: the resource curse.

Natural resource wealth can generate significant export revenues, but does it change the process of structural transformation? The evidence suggests that it does.

Among resource-rich economies, participation in manufacturing global value chains was less strongly associated with successful income upgrading than in resource-poor countries. This does not mean that manufacturing no longer matters. Instead, it suggests that resource dependence can weaken the mechanisms through which manufacturing participation generates broader domestic capability.

For policymakers, this reinforces an important message: resource wealth alone is unlikely to deliver sustained development unless it is accompanied by policies that strengthen domestic production networks and encourage diversification beyond extractive industries.

What Does This Mean for Industrial Policy?

Perhaps the most important implication of this research is that industrial policy should be stage-specific, taking into account the economic base of the country and its assets, or lack of them.

Countries should not simply aim to participate in global value chains. Rather, they should seek forms of participation that are most likely to improve their prospects of income upgrading, building on the structural capabilities already present within their economies.

For low-income economies, this means using global value chains to build manufacturing capability, strengthen domestic supplier networks and increase domestic value added. For countries approaching high-income status, the priority shifts towards innovation, knowledge-intensive services and capturing a larger share of value within global production networks. The structural characteristics associated with successful upgrading are not the same at every stage of development, and industrial policy should reflect that reality.

Trade in Value Added provides a way of observing these structural milestones.

Rather than focusing only on export growth or GDP, policymakers can begin asking different questions.

• Are domestic firms becoming more connected?

• Is participation in global value chains creating local spillovers?

• Is the economy moving into higher-value activities?

• Are we developing the capabilities that countries at our stage of economic development have historically built before successfully upgrading?

These are questions that traditional trade statistics struggle to answer. Trade in Value Added can.

Looking Ahead

This research identifies the structural characteristics that have consistently accompanied successful income transitions over the past three decades.

The next questions are equally important.

• If participation in global value chains matters, which trading partners create the greatest opportunities for upgrading?

• Which products generate the strongest domestic spillovers?

• Which industries are most effective at building the capabilities needed for the next stage of development?

  
  

Answering those questions could help move industrial policy beyond broad ambitions of export growth towards a more evidence-based understanding of how countries successfully climb the income ladder. They’re questions I’ll be examining in future blogs, so watch this space.

This article is based on research presented at the 32nd International Input-Output Association Conference in Seville, Spain. It forms part of an ongoing research programme exploring how Trade in Value Added data can improve our understanding of structural transformation, global value chains and economic development.