Global value chains (GVCs) have had some tough years. First, the Covid-19 pandemic created barriers and bottlenecks, especially in manufacturing. Then, Russia's war in Ukraine further disrupted GVCs, particularly those involving agriculture and energy.
With the fragility of globally dispersed supply networks now fully exposed, countries around the world are seeking to strengthen domestic or regional networks instead.
For developing economies, especially middle-income countries, the advent of deglobalisation poses a new challenge. After all, some of the most successful development strategies have relied on GVCs. How can economies continue to develop -- and even to reach high-income status -- if that strategy is no longer viable?
High-income status is notoriously difficult to achieve. The so-called middle-income trap -- the growth slowdown that often sets in first -- ensnares most emerging economies, with per capita income remaining at 20-40% of the level in the United States in PPP terms for several decades.
Of course, the middle-income trap does not catch everyone. Japan avoided it. So did the so-called Asian tigers: Hong Kong, Singapore, South Korea, and Taiwan. And now, Malaysia and Chile are joining their ranks, with important lessons for other developing countries navigating an increasingly deglobalized world.
In 1990, per capita income levels were lower in Malaysia and Chile than in Mexico. But, in the early 2000s, they surpassed Mexico, despite Mexico's advantages as a member of the North American Free Trade Agreement.
Since then, they have crossed the high-income threshold. Though Chile fell back below 40% of US levels during the pandemic, the World Bank still classifies Chile as a high-income economy. Malaysia remains above 40%, despite the pandemic.
This achievement might be surprising. Neither Malaysia nor Chile is renowned for its manufacturing prowess. In Malaysia, attempts to develop an automotive industry have failed, and the electronics industry has had only mixed success.
The trade surplus for Chile's four leading export goods amounts to almost 80% of total trade in four sectors, in sharp contrast to machinery and transport (-85%) and chemical products (-38%).
In Malaysia, the same ratio for palm oil was as high as 85%, and that of the combined resource sectors (including petroleum and rubber products) was 26%. This is significantly higher than the electronics sector (16%), machinery and transportation (-33%), and chemical products (-13%).
These are not low-value-added sectors. Malaysia exports processed palm oil, in contrast to Indonesia's exports of unprocessed palm oil. Likewise, Chile's salmon production requires technologies such as cold-storage systems and vaccines, and its wood-based exports include value-added products such as pulp, paper, paperboard, cork, and furniture.
These sectors are led by locally owned firms, which emerged and grew as a result of policy intervention. For example, salmon is not a native Chilean species; its cultivation in the country began in 1969, with Fundación Chile (FCH) helping to accelerate progress since the 1980s.
After Salmones Antartica, the company created by FCH, proved the potential, the number of salmon producers increased from four in 1980 to more than 200 in the 2000s.
In long-colonized Malaysia, palm-oil (and rubber) plantations used to be foreign-owned. Uninterested in moving their processing facilities to the country, these owners exported unprocessed product. But, in 1981, Malaysia seized control of three listed British palm-oil and rubber conglomerates and interest in local processing grew.
At the same time, however, Malaysia's palm-oil sector benefited from the rise of barter arrangements whereby the government negotiated deals to export processed palm oil in exchange for goods and services. This fuelled the rapid growth of palm-oil refining within Malaysia.
As with Chile's salmon industry, research and development was vital, and much of it has been carried out by the Palm Oil Research Institute of Malaysia, which was established in 1979, and funded by the government.
Even in the heyday of GVCs, developing and emerging economies largely had little hope of gaining enough of a foothold in high-end manufacturing sectors to propel them beyond middle-income levels. But Malaysia and Chile have shown that there is another way: Invest in developing high-value-added sectors that make the most of local resources. ©2022 Project Syndicate
Keun Lee, Vice Chair of the National Economic Advisory Council for the President of South Korea, is Distinguished Professor of Economics at Seoul National University and the author of 'China's Technological Leapfrogging and Economic Catch-up: A Schumpeterian Perspective' (Oxford University Press, 2022).
