External Shocks in Global Value Chains: How participants in the global coffee value chain were affected by the global financial crisis

Abstract

Globalization of trade has led to an increasingly interconnected world. A coffee farmer in the outskirts of Ethiopia can produce coffee beans that end up roasted and ready for purchasing in a London shop. This interconnectedness creates interdependencies and hence both opportunities and risks. The risk associated with this interconnectedness was demonstrated by the global financial crisis (GFC). Global trade, even coffee prices, which have nothing to do with mortgages in the U.S., were affected by the GFC. This thesis contributes to understanding the risk associated with the interconnectedness of global trade by analyzing how the GFC induced decrease in coffee prices affected different actors in the global coffee value chain (coffee GVC). It demonstrates the risk associated with the high interconnectedness of global trade. All actors in the coffee GVC were vulnerable to and affected by the GFC - an external shock which can be viewed as the materialization of these risks. In addition, this thesis finds that growers and Robusta middlemen were the most vulnerable. The vulnerability of growers cannot be explained by an unequal distribution of the effects of the GFC in terms of value added, as it is also found that the value added of middlemen in producing countries and importing country actors were the most affected. Perhaps because of the unpredictable nature of external shocks it is also demonstrated that the lead firms in the coffee GVC did not push negative consequences further upstream the GVC. In this connection lead firm governance is not found to be an important determinant of changes to value distribution in the coffee GVC during the GFC. On a theoretical level this thesis demonstrates the usefulness of the GVC approach for studying external shocks. But it also demonstrates that the structural and internal focus of the GVC approach causes a need for further development to make it truly applicable for this purpose. This thesis deals with this theoretical gap by supplementing the GVC approach with insights from price transmission theory. This supplement is found to enhance the applicability of the GVC approach for studying external shocks.