Transcending Boundaries: Navigating Structural Shifts and Labor Market Transitions Through Global Value Chains

The issue of global value chain (GVC) has paramount importance and has become a key structural phenomenon of recent world trade and payments. GVC (or, trade in intermediates) offers natural advantages to economies that possess comparative advantage at various fragmented stages of production. This article aims to theoretically examine whether participation in GVCs helps alleviate some of the fundamental structural issues in a developing economy. In so doing, we develop a general equilibrium model of GVC trade. Our findings indicate that engaging in trade within the Backward GVC exacerbates the skilled–unskilled wage gap and contributes to the informalization of the workforce. Notably, in the case of the Forward GVC, the decrease in informalization does not translate entirely into increased formalization, as a segment of the workforce ends up in the agriculture sector. A noteworthy result in our study is the observed phenomenon of trade participation in Forward GVC crowding out trade in Backward GVC, and vice versa. Furthermore, our results underscore that expanding investment is crucial in alleviating specific structural challenges associated with GVC. This suggests that investment expansion can complement trade in GVC as an effective policy measure. The results of the article are robust to the specification test of the model.