Sustainability will be the key driver for growth: AIIB's Erik Berglöf

Countries offering decarbonisation opportunities will be more competitive, says AIIB chief economist Erik Berglöf

India has managed to increase its total exports but has not really increased its share of goods that go into global value chains (GVC), a recent report by the Asian Infrastructure Investment Bank (AIIB) revealed. In an interview with Jyoti Mukul, AIIB chief economist Erik Berglöf says sustainability will be the key driver for growth. Edited excerpts:

What was the format for GVC ranking?

We would not call them ratings since the purpose of this research is to assess where countries find themselves in terms of their engagement with global value chains (GVCs). Some countries have a very extensive participation while others comparatively have less. We have noticed in the past 20 or 10 years that emerging and developing countries in general have increased their presence in GVCs. The reason for this increase is the fragmentation of the GVC wherein now you can produce a certain component of an entire machine and expand further. For example, India’s engagement in GVCs has not been as dynamic as other developing countries. India’s engagement has been more about total exports and not only global value chain related exports. India has managed to increase its total exports but has not really managed to increase its shares in terms of goods that go to global value chains.

Do you think hinterland development through better connectivity is feasible since there are no big markets there?

To expand these markets in land, or to find opportunities for people living there to get jobs or to provide opportunities for companies that want to invest there, we will need good infrastructure, and we need to provide better access to ports, airports and so on. For example, China for decades has seen growth in markets near the port as the connectivity and export strategies assist in making the market more approachable. One way to tackle this issue is infrastructure growth between the ports and inland.

Infrastructure is extremely important for creating opportunities closer to where people live, but this is not the only factor. We need to think about an integrated strategy. In the 2021 AIF report, we talked a lot on how to package policies together to make it attractive for international or national global value firms to invest in the country. For example, offering access to renewable energy, hydropower can be attractive for businesses that want to find ways to decarbonise their productions.

How has Covid changed government strategies for global value chains across the world and particularly in Asia?

One of the striking things is how little change we have seen so far — the initial lock down might have affected the GVC, but they came back (on the right track) very quickly. And what we have been seeing now, like the disruptions, delays or dislocations in the GVCs, are more reflections of the uneven opening up and the extreme stimulus that many advanced economies have applied. And all that demand is now creating bottlenecks throughout the global value chain.

One of the striking changes is the ability to work from home. Remote working has made companies think about the development of digital infrastructure and companies are also trying to evaluate the strategy to understand at what places remote working can be implemented and where employees need to be physically present — that will affect GVCs around Asia. Another factor that will affect the value chains is the net-zero transition where companies will have to make major decisions on where to produce, where to transport, what to produce etc to contain the pressure to move towards net-zero.

My sense is that the trend towards more participation from emerging and developing countries in the GVCs will continue — a trend that will shift from advanced economies to emerging and developing countries. Countries that can offer the decarbonisation opportunities will be more competitive.

How do you decarbonise when most freight in India moves on diesel run trucks and electric railway traction that uses coal-based power?

As countries focus on reducing domestic emissions and meeting their national targets under the Paris Agreement, they will increasingly look at carbon emissions embedded in trade to prevent carbon leakage. Greening GVCs and achieving commonly high standards are perhaps the most fundamental and difficult of all challenges.

We believe that electrification is very important, and it needs to happen as soon as possible. Initially we might see that electricity might come from coal-based power but gradually we need to make amends and phase out coal as a source of fuel and switch to other forms of green electricity. We are experiencing some positive changes like the Indian Railways working on a project to use solar power to run electric trains. This change requires a lot of innovation and utilisation of technologies in the right way.