WEEK 5 NOTES

AIE1003 Political Economy of International Relations: Developing Countries and the International Economy

Key Takeaways

  • Forces that Drive Industrial Policies

  • Industrial (and Trade) Policy, Instruments, and Tools

  • Malaysia’s Industrial and Trade Policy Experience

  • New Developments and Challenges (contingent on time and interest)

Forces that Drive Industrial and Trade Policies

Economic Development

Development is a common theme in Malaysia, typically linked to national economic goals and achievements. While development is often equated with economic performance, social and political progress is frequently viewed as secondary. According to Aun (2004), no consensus exists on the precise definition of a developed country. The United Nations classifies countries into three broad categories: developed economies, economies in transition, and developing economies. While the WTO has no specific definitions, classifications often include Low-Income, Lower-Middle, Upper-Middle (developing), and High-Income Groups (developed). Indicators of development include low living standards, income inequality, poor health, and inadequate education.

Industrialization

Industrialization is viewed as a significant benchmark for a modern, advanced, and robust economy. For many developing nations, industrialization is a top priority as it reshapes their economic structure. The contribution of agriculture, in terms of employment, output, and exports, is notably substantial in developing countries compared to industrialized ones.

Typical Development Trajectory

Countries typically progress through several phases during industrialization:

  1. First Phase: Dominance of Agriculture

  2. Second Phase: Increase in Heavy Industries

  3. Third Phase: Expansion of Manufacturing

  4. Fourth Phase: Transition to Services

Industrial Revolution

The Industrial Revolution marks the shift from an agrarian economy to an industrial and manufacturing-driven one. It was characterized by several factors:

  • Emergence of capitalism versus mercantilism

  • European imperialism providing markets for goods and raw materials (coal, iron, steel)

  • Technological advancements (e.g., water and steam engines, spinning jenny)

  • The factory system which introduced division of labor and specialization

Implications of this revolution included profound shifts in economic and social structures, including the emergence of new social classes, wealth distribution, rapid urbanization, and enhanced productivity. The evolution of this industrial phase can be classified into:

  • 1st Industrial Revolution: Water and Steam Power, Mechanization

  • 2nd Industrial Revolution: Mass Production, Electricity, Assembly Line

  • 3rd Industrial Revolution: Automation, Robotics, Electronics

  • 4th Industrial Revolution: Cyber-Physical Systems (CPS), Digital Processes

  • 5th Industrial Revolution: Collaboration between humans and machines, Cognitive Systems

Globalization and Regionalism

Globalization is defined as the increasing internationalization of markets, production, financial systems, and technologies (OECD). In contrast, regionalism refers to the institutional arrangements facilitating the free movement of goods and services within geographic regions (Britannica). These dynamics influence economic policies, the changing role of the nation-state, and the nation-state’s economic performance. Both phenomena have yielded both positive outcomes (e.g., poverty eradication) and negative impacts (e.g., financial crises and pandemics).

Geopolitics and Geoeconomics

  • Geopolitics: Analysis of geographic influences on power dynamics in international relations, including boundaries and natural resources (Britannica, International Encyclopedia of Human Geography).

  • Geoeconomics: Involves the use of economic means to advance geopolitical goals, reflecting the gradual shift from military to economic power in global interaction. This includes trade wars and economic decoupling (Schneider-Petsinger, 2020; Luttwak, 1990).

Industrial (and Trade) Policies

Definition and Goals

Industrial policy is a comprehensive governmental strategy aimed at supporting industries through protection and job creation (Frederick C. Gamst, 2015). Trade policy involves managing international exchanges of goods and services and is bifurcated into:

  1. Regulation of imports

  2. Management of exports (promotional and control measures)

The main goal is to enhance specific economic sectors to boost productivity and generate positive externalities across the economy.

Malaysian Context

Malaysia’s industrial and trade policies are guided by national visions such as:

  • Vision 2020

  • WKB2030

  • Ekonomi MADANI (which includes strategies for improvement in productivity and governance)

Industrial Policies Types

Countries often adopt protectionist policies early in industrialization, transitioning from Import Substitution Industrialization (ISI) to Export Oriented Industrialization (EOI) as confidence in their industries grows. Key types of industrial strategies include:

  • Import Substitution Industrialization (ISI)

  • Export-Oriented Industrialization (EOI)

  • Trade Liberalization

  • Focused Industrial Policies

Key Instruments and Tools

  • At the Border: Tariffs, Non-Tariff Barriers (NTBs), Quotas, Licenses

  • Behind the Border: NTBs on labor, environmental standards, product standards, Trade Support (subsidies, loans, tax incentives), Trade Remedies (anti-dumping, countervailing measures)

Import Duty

  • Tax levied on imports and exports, divided into:

  1. Specific Tariffs (fixed charges)

  2. Ad Valorem Tariffs (based on value)

The goals include domestic industry protection and government revenue generation.

Subsidies

Direct subsidies, low-cost loans, or tax relief aimed at promoting exports rather than domestic consumption are common. However, WTO prohibits most export-linked subsidies.

Import/Export Quotas

These limit the volume of goods that can be exported/imported, ensuring domestic supply adequacy and managing international trade relationships.

Malaysia’s Industrial and Trade Development Experience

Historical Perspective

Malaysia's history is intertwined with trade via the Maritime Silk Road, colonial exploitation of its resources, and export-led growth ambitions. Significant economic milestones include the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.

Evolution of Malaysia’s Policies

Malaysia's industrial policies have evolved through multiple phases:

  1. First Phase (1897–1957): Agricultural exports (rubber, tin)

  2. Second Phase (1957–1969): ISI

  3. Third Phase (1970–1980): Export-Oriented Industrialization

  4. Fourth Phase (1981–1997): Second round of ISI and EOIs

  5. Fifth Phase (1997–2005): Recovery from Asian Financial Crisis

  6. Sixth Phase (2006–Present): Focus on globalization and digitalization

Advanced Framework and Focus Areas

New Industrial Master Plan (NIMP 2030)

  • Launched on September 1, 2023, by the Ministry of Investment, Trade and Industry (MITI).

  • This plan is structured to run for 7 years and targets significant contributions to GDP and exports from manufacturing driven by megatrends including digitalization and sustainability.

  • Vision: Building a competitive economy with skilled workforce and strong domestic linkages focusing on six key goals.

Strategic Framework and Implementation

The plan is supported by missions aimed at advancing economic complexity, fostering technological innovation, and ensuring inclusiveness while establishing performance monitoring through mission-driven projects.

Current Challenges and Implications

Global Economic Dynamics

In light of the rise of China and India, new economic orders are perpetually formed, leading to economic decoupling and unique geopolitical tensions particularly between major powers like the US and China.

Armed Conflicts

Emerging conflicts, notably the war in Ukraine, underline the broader economic implications on social welfare and global supply chains, particularly in agriculture, resulting in increased poverty and food insecurity.

Conclusion

Industrialization is increasingly linked with modernization and development policies in many developing countries, with varying degrees of success contingent on contextual factors. Each country must tailor its policies to suit its unique economic landscape.

Peter Brian M. Wang, PhD.
Deputy Head Centre of Economics and Public Finance INSTITUT TADBIRAN AWAM NEGARA