AIE1003 Political Economy of International Relations

Developing Countries and the International Economy

Industrial (and Trade) Policies

Presenter: Peter Brian M. Wang, PhD, Deputy Head, Centre of Economics and Public Finance, Institut Tadbiran Awam Negara (INTAN)

Key Takeaways

  • Understanding the forces that drive industrial policies.
  • Overview of industrial (and trade) policy instruments and tools.
  • Analysis of Malaysia's industrial and trade policy experience.
  • Discussion on new developments and challenges (time permitting).

Forces that Drive Industrial and Trade Policies

Economic Development
  • Development is a key term in Malaysia, often linked to economic goals and achievements, serving as a political platform.
  • Quote from Aun (2004): "Development is frequently spoken word in Malaysia, usually in reference to the nation’s economic goals and achievements, and as a political platform and rallying point…Official and popular attitudes toward development tend to equate success with economic performance, with social and political progress effectively regarded as subsidiary."
  • Lack of precise definitions for developed countries, with the UN categorizing countries into:
    • Developed economies
    • Economies in transition
    • Developing economies
  • Countries generally classified into low, lower-middle, upper-middle, and high-income groups based on various indicators including income levels, inequality, health standards, and education adequacy.
  • References: Aun, L. H. (2004); UN World Economic Situation & Prospects; World Bank data.
Proses of Industrialization
  • Industrialization is a national priority for developing countries, representing a benchmark for a modern, advanced, and strong economy.
  • It transforms the economic structure, wherein the contribution of agriculture is heavily pronounced in developing countries compared to developed ones.
Development Trajectory
  1. First Phase: Agriculture
  2. Second Phase: Heavy Industries
  3. Third Phase: Manufacturing
  4. Fourth Phase: Services
Historical Context of the Industrial Revolution
  • Transition from agrarian economies to industrial domination marked by significant developments such as:
    • Emergence of capitalism replacing mercantilism.
    • Expansion due to European imperialism providing markets and raw materials.
    • Technological advances in production such as the water and steam engines, and the organization of production in factories (division of labor).
  • Impact: Changes in economic and social organization, emergence of new social classes, rapid urbanization, and economic growth characterized by increased productivity.
  • Timeline of industrial revolutions:
    1. 1st IR: Water and Steam Power, Mechanization
    2. 2nd IR: Mass Production, Electricity, Assembly Line, Division of Labour
    3. 3rd IR: Automation, Robotics, Electronics, Computers
    4. 4th IR: Cyber-Physical Systems, Digital Processes, Internet of Things.
    5. 5th IR: Co-working of man and machine, Cyber-Physical Cognitive Systems.
Globalization and Regionalism
  • Globalization: Defined as increasing internationalization of markets for goods and services, financial systems, competition, and industries (OECD).
  • Regionalism: Inter-country economic arrangements designed to facilitate free flow of goods and services (Britannica).
  • These dynamics affect:
    • Formulation of economic policies.
    • The changing role of nation-states.
    • Economic performance of nation-states.
  • Balance of pros and cons over decades, including high growth rates, industrialization, economic crises (1997, 2008), and the COVID pandemic.
Geopolitics and Geoeconomics
  • Geopolitics: The analysis of geographical influences on power relations in international relations; how geographical arrangements reinforce or undermine political power (Britannica, International Encyclopedia of Human Geography).
  • Geoeconomics: Use of economic tools to achieve geopolitical objectives, emphasizing economic strategies over military ones (Schneider-Petsinger, Luttwak).
  • Examples include trade wars and economic decoupling, showing the interplay of economics and international strategy.

Industrial (and Trade) Policy

Definitions and Components

  • Industrial Policy: A national plan involving government interventions to support industries and protect jobs (Gamst, 2015).
  • Trade Policy: Manages international exchanges of goods and services, categorized into:
    1. Regulation of imports
    2. Management of exports (export promotion and controls) (Velut, 2015).
  • Goals include promoting specific economic sectors for enhanced productivity and positive externalities throughout the economy.
  • Question: Is industrial and trade policy a necessity?
The Malaysian Context
  • National Vision: Includes Vision 2020, WKB2030, and Ekonomi MADANI, outlining development objectives to be achieved through medium-term plans.
  • National Development Plans: Frameworks for policies aimed at transforming the economy, such as:
    • Industrial Policy: Framework for economic transformation (e.g., IMP 3, Industry 4WD, NIMP2030).
    • Trade Policy: Framework governing trade practices and negotiations.
Types of Industrial Policies
  • Development strategies typically evolve from protectionist policies to export-oriented industrialization as countries gain confidence:
    • Import Substitution Industrialization (ISI): Replace imports with locally-produced goods.
    • Export-oriented Industrialization (EOI): Focus on producing for export, emphasizing comparative advantages.
    • Trade Liberalization: Opening up trade to enhance competitiveness.
Key Instruments and Tools of Policy
  • At the Border:
    • Tariffs: Taxes on imports/exports, which can be specific or ad valorem.
    • Non-Tariff Barriers (NTBs): Quotas and licenses.
  • Behind the Border:
    • Regulatory measures (e.g., labor, environmental standards).
    • Trade support mechanisms (e.g., subsidized loans, tax incentives).
    • Trade remedies including anti-dumping and countervailing measures.
Import Duty and Subsidies
  • Import Duty: A tax levied on imports or exports, categorized into specific tariffs (fixed) and ad valorem tariffs (percentage of value). Goals include protecting domestic industries and generating government revenue.
  • Subsidies: Financial assistance for exporters aiming to encourage exports and discourage domestic market sales; however, WTO limits most direct export subsidies.
Import/Export Quotas
  • Limits imposed on the volume of trade (both imports and exports) to protect domestic industries, assuring adequate market supply.
  • Examples include tariff rate quotas for agricultural goods and voluntary export restrictions.

Malaysia's Industrial and Trade Development Experience

Historical Perspective
  • Historical roots tracing back to the Maritime Silk Road and implications of imperialism, along with significant economic phases:
    • Export-led growth in the 90s, emergence as an Asian tiger.
    • Impact of the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.
Evolution of Malaysia’s Industrial Policies
  • The timeline spans various phases:
    1. 1st Phase (1897-1957): Colonial exports of agricultural goods.
    2. 2nd Phase (1957-1969): Import Substitution Industrialization.
    3. 3rd Phase (1970-1980): Export-Oriented Industrialization.
    4. 4th Phase (1981-1986): Second Round ISI and introduction of EOIs.
    5. 5th Phase (1997-2005): Recovery post-Asian Financial Crisis.
    6. 6th Phase (2006-present): Globalization and further development in Fourth Industrial Revolution.
New Industrial Master Plan (NIMP 2030)
  • Launched by the Ministry of Investment, Trade and Industry on September 1, 2023, running until 2030.
  • Manufacturing's contribution to GDP is approximately 24% with around 80% of exports originating from this sector.
  • The plan is guided by global megatrends: digitalization, sustainability, and supply-chain shifts, aiming for economic complexities and inclusivity.
  • Goals: Manufacturing value-added targeted at RM 587.5 billion with a 6.5% growth rate annually and six key focus areas for development.

Implementation and Implications

  • Emphasizing a whole-of-nation approach involving federal, state, and industry collaboration.
  • Focusing on inclusivity across various states and participation from SMEs, ensuring strong governance and performance monitoring.

Trade Dependence and Economic Growth

  • The strong interdependency of trade and industry reflects in Malaysia's trade-to-GDP ratio of 173.5 (2009-2011).
  • Ensuring an open, fair global trading environment through participation in extensive frameworks like GATT, WTO, ASEAN, etc. is crucial for sustaining economic growth.

Export-Oriented Industrialization (EOI)

  • EOI methods encompass export substitution industrialization and focus on producing goods aligned with local comparative advantages.
  • Characteristics include low trade controls, alleviating export barriers with subsidies.
  • Countries that successfully adopted EOI strategies include Japan, Hong Kong, Taiwan, South Korea, and China, documenting substantial growth.
Import Substitution Industrialization (ISI)
  • ISI strategies involve substituting imported goods with domestically produced products through protective measures aimed at economic development.

Trade Liberalization and Policy

  • Trade policies derived from rules to regulate international trade flows and promote development while achieving societal welfare.

Specialized/Focused Industrial Policies

  • These policies target specific industries through tariffs, restrictions, and subsidies to foster growth in those sectors. Evidence shows little correlation between rapid growth in the targeted industries compared to non-focused approaches (e.g., case in South Korea).

Conclusion

  • Industrialization signifies a core component of modernization and development within developing nations. The strategies that have been pursued include ISI, EOI, trade liberalization, and specialized policies, each varying in success based on the contextual conditions of respective countries.