The Political Economy of Moving Up in Global Value Chains: How Malaysia Added Value to Its Natural Resources through Industrial Policy

Introduction

• Study of Malaysia's political economy and value addition to natural resources.
• Role of industrial policy in overcoming market obstacles in developing countries.
• Malaysia's shift from raw material export to industrial development.

Historical Context

• At independence (1957), economy relied heavily on tin and rubber exports.
• Diversification began in 1970s towards palm oil and petroleum.
• Shift towards value addition characterized by knowledge, R&D, and technology.

Malaysia's Industrial Policy

• Laissez-faire British policies discouraged value addition pre-independence.
• Post-independence policies encouraged value-added activities.
• Industrial policies in rubber, palm oil, and petroleum sectors.

Theoretical Perspectives

• Linkage Development: Importance of production linkages for economic diversification.
• Global Commodity Chains (GCC): Dynamics between lead firms and suppliers influence value addition.
• Developmental State: State intervention is crucial for overcoming barriers to value addition.

Overview of Value Addition in Malaysia

• Resource-based industries significantly contribute to Malaysia's trade balance.
• Palm oil, rubber, and petroleum industries show substantial value addition.
• Government incentives crucial in enabling vertical integration and export orientation.

Sector-Specific Developments

Rubber Industry

• Evolution from raw rubber to manufactured products.
• Government agencies facilitated R&D and export promotion.
• Quality control and fiscal incentives played key roles.

Palm Oil Industry

• Development driven by diversification from rubber.
• Nationalization in the 1980s increased domestic processing.
• Government policies included fiscal incentives and R&D support.

Petroleum Sector

• Petronas key in upstream and downstream capability development.
• Localization through legal frameworks and state-led investments.
• Investment in human capital and internationalization of Petronas.

Political and Economic Factors

• Long-term political stability allowed for strategic policy implementation.
• Executive dominance and coalition-building aided policy continuity.
• Influence of East Asian models and pragmatic policy adaptation.

Key Findings

• State interventions necessary to overcome market barriers.
• Holistic industrial policy approach includes R&D, skills development, and trade promotion.
• Domestic ownership facilitates linkage development in value chains.
• Political context significantly influences resource-based industrialization.

Conclusion

• Malaysia’s experience informs debates on upgrading commodity value chains.
• Importance of state roles in overcoming global commodity chain challenges.
• Potential lessons for replicating value addition policies in other regions.