8.1 Global Value Chains Are Spatially Concentrated in Mexico and Vietnam

MAP 8.1 Global Value Chains Are Spatially Concentrated in Mexico and Vietnam

a. Mexico, 2015 b. Vietnam, 2014

% of firms that participate in GVCs, by state

3.7 to 5.5% 2.9 to 3.7% 1.4 to 2.9% 0.7 to 1.4% 0

Source: World Bank 2020. Note: GVCs = global value chains.

500 km Log of employment of GVC firms per capita, by province –3.3 to –1.2% –5.3 to –3.3% –7.3 to –5.3% –9.3 to –7.3% –11.3 to –9.3% No data

0 300 km

are attracted to areas with better connectivity and lower transport costs. For instance, lower transport costs, including digital information and communication technology, has facilitated the emergence of GVCs, driving the growth of megacities such as Shenzhen and other Chinese coastal cities, while the inland western provinces remain less plugged in. In light of the findings of sterile agglomeration in chapter 2, this pattern is not necessarily bad: GVCs can spur the structural transformation missing in the agglomeration process of many developing countries.

Trade-offs between Fiscal Incentives and Other Interventions

Fiscal incentives also have trade-offs with other desirable interventions. Thus, their cost-benefit ratio needs to be compared to alternative initiatives. To this end, a detailed analysis of such costs and benefits by Bartik (2018) suggests that a 10 percent cut in business taxes may create jobs at a cost of $18,000 per job per year. However, because such cuts need to be financed by either other tax rises or budget cuts, the lost employment resulting drives that cost to $38,000. If they are financed by cuts to educational expenditure, then the costs rise to $230,000. If financed by tax increases that fall mostly on the top decile of the population, then costs fall substantially. However, if financed by generalized taxes, then the lost employment arising from the reduced multiplier effect of spending is $24,000. Targeting incentives through subsidies to job creation tax credits or property tax abatements lowers costs dramatically to between $10,000 and $20,000, largely because they are no longer subsidizing firms that are already there and

can be targeted at export-oriented firms. Given that jobs created in export-oriented firms have a multiplier of roughly two or more in the United States, Bartik estimates that the cost per job per year is more on the order of $8,000.

Bartik’s exercise is useful not only in thinking through the design of fiscal incentives, but also for reflecting on their value relative to other possible interventions. In the end, Bartik argues that fiscal incentives are less cost-effective than, for instance, the underwriting of business-targeted services that raise the productivity of firms (such as customized job-training programs and manufacturing extension programs) or human capital development services targeted at households (such as high-quality preschool education, improvements in the quality of K–12 education, and demand-oriented job training programs). For areas that already have a manufacturing base, Bartik’s estimates suggest that customized business services cost roughly one-seventh to one-third as much per job per year created relative to business tax incentives—again, depending on how they are financed. This is consistent with the evidence from Hawassa that these other complements were more important. While Moretti (2010) shows that attracting higher-tech and higher-wage industries has higher job multipliers—implying that targeting those types of firms might lower the cost per job further—high-tech firms go where they can find skilled workers, ample amenities, established universities, and excellent logistics, as in Boston and Detroit (see chapter 5). Financial incentives become secondary.

An important issue pertains to horizontal coordination across jurisdictions to avoid “beggar-thy-neighbor” tax competition, where footloose firms drive down the margin of social benefits by shopping for the best incentive package from each subnational government. Spatial reallocation of industries can drive productivity improvements if the movement is in response to the underlying distortions. In the early twentieth century, the movement of the textile industry from New England to the American South indubitably helped the latter develop, but it hollowed out employment in the former region—one of the factors that weakened Boston’s economy. To the degree that this was driven by a desire to escape collective bargaining agreements in the North, or simply that the “selling of the South” reduced information asymmetries that allowed substantially better allocation of capital and knowledge, then arguably this may have improved welfare at the national level.

Although not the case in New England, such reallocations can be done in a deliberate and equitable fashion. In Sweden, management and unions agreed to outsource lower-skill jobs while displaced Swedish workers were retrained for emerging higherproductivity industries (Hjalmarsson 1991). The gains are far less clear when similar cities compete by offering subsidies to attract high-tech firms from other locales.7 Einiö and Overman (2020) find substantial displacement effects stemming from the 2006 UK Local Enterprise Growth Initiative, which sought to increase entrepreneurial activity in deprived areas, support growth, reduce exit rates among local businesses, and attract investment. This can result in a zero-sum game where each jurisdiction gives up