At the 31^st ERF annual conference later this month, a special session will focus on global value chains (GVCs) from the perspective of sustainable development in the Middle East and North Africa (MENA). Three new studies that address the Sustainable Development Goals (SDGs) in different ways reveal that macroeconomic, environmental and institutional factors all matter for GVCs.

First, at the macroeconomic level, a wide body of research evidence supports the existence of a robust association between economic growth, trade performance and real exchange rate misalignment in terms of undervaluation, especially for developing economies. Yet the study by Abdou et al (2024) to be presented at the conference shows that in a world of GVCs, products become multi-country products as intermediate inputs are imported, transformed and then re-exported, which makes the impact of exchange rate misalignment less straightforward.

Their research assesses the impact of real exchange rate (RER) undervaluation on the two main components of GVC participation. First, the domestic value added of a country, which is embodied in the exports of other countries (what is known as forward GVC participation). Second, the foreign value added embodied in a country’s exports (backward GVC participation).

The researchers investigate the significance of this impact while controlling for the level of financial development, the quality of institutions and the degree of digitisation, al potentially important determinants of GVCs. They show that currency undervaluation has a positive impact on GVC participation. Indeed, undervaluation acts as a compensatory factor for countries with weak institutions. In addition, the impact of this undervaluation becomes more pronounced as the level of digitisation in the economy increases.

Second, at the environmental level, Hazem and Zaki (2025) focus on the environmental determinants of GVCs. They note that the MENA region stands among the most vulnerable areas to the impacts of climate change. At the same time, with lax environmental regulations, the region’s integration into GVCs is modest. The study examines the effects of environmental stringency on GVC participation in MENA countries.

Using data from the World Bank Enterprise Surveys, the researchers analyse how environmental regulations and treaties affect both the extensive and intensive margins of GVCs (the likelihood of integrating into a GVC and the depth of integration). Their results show that national environmental regulations increase the likelihood of firms integrating into GVCs. This highlights the role of such regulations in attracting GVCs into developing countries.

The authors show that these regulations increase the effect of spending on research and development on GVC participation. Yet the results are less conclusive for the role of environmental treaties. Finally, large firms seem to benefit more from such regulations given their greater ability to abide by stringent standards since they can bear the sunk cost associated with these regulations.

Finally, at the institutional level, Aboushady and Zaki (2023) examine the impact of connections on firms’ participation in GVCs for six MENA countries (Egypt, Jordan, Lebanon, Morocco, Tunisia, and the West Bank and Gaza).

Despite substantial liberalisation efforts carried out by MENA governments since the 1990s, non-tariff measures (NTMs) and the imposition of complex barriers to entry and operation specifically tailored to protect these politically connected domestic firms have proliferated. Moreover, politically connected firms enjoyed specific privileges that have enabled them to perform better than non-connected ones.

The researchers explore whether political connections help firms to overcome barriers to trade and investment and increase their participation in GVCs at the extensive margin (the likelihood of integrating into a GVC) and the intensive margin (the depth of integration). The findings suggest that political connections matter for firms’ participation in GVCs. The impact is more pronounced for firms that combine political connections with informal payments to influence policy-making.

From a policy perspective, there are three implications.

At the macroeconomic level, undervaluation can act as a second-best solution to mitigate the economic cost of poor institutions and market failures that more specifically penalise the tradable sector and the value-added exports. To maintain the positive effect of RER undervaluation, exchange rate policy should be coupled with other deeper reforms to improve institutions. In addition, a higher level of digital transformation is needed.

At the environmental level, finding effective mechanisms to implement and enforce national environmental legislation is indispensable. The research shows the extent to which treaties are less effective in attracting GVCs given that they might be vague, without specific commitments or objectives. That is why national legislation is necessary to address climate change issues. This might be complemented with either environmental treaties or environmental provisions in trade agreements.

Finally, at the institutional level, hidden protectionism from political connections is likely to offset the liberalisation efforts and investment-related reforms made by MENA countries. Increasing transparency and levelling the playing field for firms investing in MENA countries is a precondition for better integration into international markets. That in turn requires deep and long-term institutional reforms.

Further reading

Abdou, Mariz, Ibrahim Elbadawi, Patrick Plane and Chahir Zaki (2024) ‘Unravelling the Nexus between Exchange Rate Undervaluation and Global Value Chains Participation’, ERF Working Paper No. 1709.

Aboushady Nora, and Chahir Zaki (2023) ‘Are Global Value Chains for Sale? On Business-State Relations in the MENA Region’, IDOS Discussion Paper No. 17/2023.

Hazem, Nada, and Chahir Zaki (2025) ‘Environmental Stringency and Firms’ Participation in Global Value Chains: Evidence for MENA Countries’.

The session at the ERF annual conference is financially supported by the Chair of Environmental and Mineral Economics at the University of Orleans and the German Institute of Development and Sustainability.