Global value chains and within-country inequality: The role of functional positioning

This work addresses the nexus between Global Value Chains (GVCs) and within-country inequality by distinguishing two key dimensions: the “product-level positioning” of economies, i.e. their involvement in more upstream or downstream industries, and their “functional positioning”, defined by the value-adding activities performed along GVCs. Using trade and FDI data on 101 countries in 2003–2015, we show that a more upstream product-level positioning is associated with higher inequality in low- and middle-income countries. This is consistent with these countries’ greater involvement in industries supplying raw materials and energy inputs, characterised by a remarkable income polarisation. Conversely, a more downstream product-level positioning goes together with greater inequality in high-income countries, reflecting downward pressures on labour income due to massive outsourcing of inputs to foreign suppliers. As for functional positioning, we find that a greater involvement of economies in pre- and post-production stages is associated with lower income disparities, while a larger engagement in production operations goes together with higher inequality. This result is driven by low- and middle-income countries, suggesting that a greater involvement in knowledge-intensive GVC activities fosters technological upgrading in these economies, with beneficial effects also on the lower segments of the labour force.