10 th _ 11 th october 2015 tehran, iran,. introduction background methodology findings policy...

Institute for Trade Studies and Research

Ministry of Industry, Mine and Trade Islamic Republic of Iran

High-Level Symposium on Industrial and Trade policies: Promoting Exports and Developing Employment

Malaysian Experience in Moving up Global Value Chains in Resource-Based

Industries

Zakariah Abdul Rashid

Malaysian Institute of Economic Research10th _ 11th October 2015

Tehran, Iran,

Outline

Introduction Background Methodology Findings Policy implications Conclusion

Introduction

Ricardian and Heckscher-Ohlin models are insufficient to explain trade and industrial development as regards to the differences between resource and non-resource based industries.

Since 1990s trade not dependent only on differences in factor endowments and technology but also on regional production networks and GVC.

Fragmented production networks and global value chains (GVCs) characterize trade and investments

GVCs are the norm now

What are GVCs?

Value chain - full range of activities that firms perform to bring a product from its conception to end-use and beyond

The activities that comprise a value chain can be contained within a single firm or divided among different firms

Before Fragmentation

PBSL

SLSL

SL SL

PB

PB

PB

PB

Old Factory

PB: production blockSL: service link

After Fragmentation

Objectives The overall objective is to explain the

industrial and trade policy within the context of broader national economic policy objectives.

It explains how the differences in the production performance between resource and non-resource based industries are affected by GVC.

Specifically, it will explain the contribution of components of final demand to output growth and estimate their primary inputs multipliers.

Methodology

The paper uses standard decomposition of output growth analysis, attributing output growth to Domestic demand expansion, Export demand expansion, Intermediate demand expansion and Import substitution

Methodology

Under equilibrium conditions, open input-output relation can be postulated as:

X= D + W + E-M,

where

X = vector of gross output

D = vector of domestic final demand

W = matrix of intermediate demand

E = vector of export demand

M = vector of imports

Methodology

  Output growth (1)

∆X = R μ1 ∆D + R∆E + Rμ1∆AX0 + R∆μ(A0X0 + D0)

(1) (2) (3) (4) (5)

is decomposed into that due to

(2) domestic demand expansion

(3) export demand expansion

(4) intermediate demand expansion

(5) import substitution demand

Methodology

I-O analysis is appropriate for study of GVCs The input from one firm or a subsidiary of the firm is used

as an input for another firm The international fragmentation of production focuses on

the imported input shares of gross output, total inputs or exports

Multipliers calculated using following formula:

Where ν = primary input including value added coefficient,; b = Leontief coefficient, and

σ = multiplier for sector k

Sources of Data

Malaysia’s input-output tables for the years 1991, 2005 and 2010.

deflate all the tables into a common base year. Aggregating and conforming all the three years’

classifications Weighted average using sectoral output as weight GVC analysis examines products exported from

Malaysia Propose to examine exports to major export

markets such as China, Singapore, USA, Europe and Japan

Methodology The following will be calculated

– Value added of main export categories– Value of compensation of employee and operating surpluses– Key multipliers

• Value added multiplier• Compensation of employee multiplier• Operating surplus multiplier• Output multiplier• Imported commodity multiplier

We are proposing for policy recommendations to undertake focus groups discussion (FGD), which will be held with:

– Government agencies (i.e. MITI, SME Corp)– Trade associations (FMM)– Chambers of commerce

Methodology Classification of sectors by Export Oriented (EO) and Non-

Export Oriented (NEO), also by Resource Base (RB) and Non-Resource Base (NRB).

Legend: • EO = export oriented• NEO = non-export oriented• EORB = export oriented resource base • EONRB= export oriented non-resource base• NEORB= non-export oriented resource base • NEONRB = non-export oriented non-resource base • RBM = resource base manufacturing• RBNM = resource base non-manufacturing• NRBM = non-resource base manufacturing• NRBNM = non-resource base non-manufacturing

Input Structure

Intermediate Input45%

Imported Commodity

44%

Compensation Employee

4%

Operating Surplus8%

Sector 74


Imported Commodity

56%


1%

Operating Surplus1%

Sector 75

2005NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards

Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods

Input Structure


Imported Commodity

6%


2%

Operating Surplus10%

Sector 21

2005

NOTE: Sector 21 = Oils and FatsSector 6 = Oil Palm


Imported Commodity

7%Compensation

Employee28%

Operating Surplus

34%

Sector 6

Input Structure


Imported Commodity

57%


6%

Operating Surplus

16%

Sector 74


Imported Commodity

47%


13%

Operating Surplus

24%

Sector 75



Input Structure


Imported Commodity

4%

Compensa-tion Em-ployee

2%

Operating Surplus

4%

Sector 21

2010


Imported Commodity

8%


14%

Operating Surplus

61%

Sector 6

NOTE: Sector 21 = Oils and FatsSector 6 = Oil Palm

Input Structure


Imported Commodity

57%


6%

Operating Surplus

16%

Sector 74


Imported Commodity

47%


13%

Operating Surplus

24%

Sector 75



Source of Overall Output Growth

Source of Demand FormulaOVERALL

1991-2005 1991-2010

Export DD R(E1-E0)% 51.04% 43.62%

Domestic DD R(μ1(D1-D0))% 12.44% 25.98%

Intermediate DD R(μ1(A1-A0)X0)% 7.73% 9.36%

Import Subs R((μ1-μ)(A0X0+D0))% 28.80% 21.05%

TOTAL 100.00% 100.00%

In 1991-2005, export demand has shown the highest contribution to output growth, followed by Import substitution.

While in 1991-2010, it is slightly decrease in export demand contribution to output growth,

Important to identify source of output growth in Resource Based & Non-Resource Based

Industries

Source of DemandResource Based Non-Resource Based

1991-2005 1991-2010 1991-2005 1991-2010

Export DD 57.33% 49.87% 48.39% 39.64%

Domestic DD 4.04% 17.86% 15.98% 31.14%

Intermediate DD 8.02% 6.90% 7.60% 10.91%

Import Subs 30.60% 25.37% 28.04% 18.30%

TOTAL 100.00% 100.00% 100.00% 100.00%

With respect to sources of output growth, Resource Based industry is more dependent on export demand, while Non-Resource Based industry is more dependent on domestic demand.

In both industries, Domestic Demand become more significant over the period in contributing to output growth.

Overall0.62

EO0.58

EORB0.65

RBM0.59

RBNM0.86

EONRB0.54

NRBM0.36

NRBNM0.71

NEO0.77

NEORB0.82

RBM0.73

RBNM0.83

NEONRB0.76

NRBM0.51

NRBNM0.76

Important to know the primary input multiplier: Value Added (VA) Multiplier 2005

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the VA multiplier of the activity

• CPO (21) – 0.751

• Petroleum Refinery (44) – 0.593

• Crude Oil & Natural Gas (13) – 0.892

• Semi-conductor devices (74) – 0.343

• TV, Radio & transmitter (75) – 0.220

• Oil Palm (6) – 0.844

Overall0.70

EO0.67

EORB0.69

RBM0.65

RBNM0.86

EONRB0.65

NRBM0.41

NRBNM0.78

NEO0.80

NEORB0.85

RBM0.66

RBNM0.87

NEONRB0.80

NRBM0.00

NRBNM0.80

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the VA multiplier of the activity

Important to know the primary input multiplier: Value Added Multiplier 2010



• CPO (21) – 0.811

• Petroleum Refinery (44) – 0.731


• Oil Palm (6) – 0.876

Discussion

Value added (VA) multiplier over time period has increased NEO has bigger VA multiplier Resource base multiplier bigger than non-resource base RBNM bigger than RBM NRBM is smallest

Overall0.17

EO0.14

EORB0.12

RBM0.13

RBNM0.08

EONRB0.15

NRBM0.09

NRBNM0.21

NEO0.30

NEORB0.30

RBM0.26

RBNM0.31

NEONRB0.30

NRBM0.19

NRBNM0.30

Important to know the primary input multiplier: Compensation Employee (CE) Multiplier 2005

• CPO (21) - 0.250• Petroleum

Refinery (44) – 0.066




• Oil Palm (6) – 0.354

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the CE multiplier of the activity

Overall0.20

EO0.18

EORB0.13

RBM0.14

RBNM0.09

EONRB0.22

NRBM0.12

NRBNM0.27

NEO0.28

NEORB0.17

RBM0.19

RBNM0.17

NEONRB0.31

NRBM0.00

NRBNM0.31

Important to know the primary input multiplier: Compensation Employee Multiplier 2010

• CPO (21) – 0.186• Petroleum

Refinery (44) – 0.071


• Semi-conductor devices (74) - 0.096


• Oil Palm (6) – 0.170

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the CE multiplier of the activity

Discussion

Compensation employee (CE) multiplier has increased from 2005 to 2010

NEO has bigger CE multiplier NEORB and NEONRB has bigger CE multiplier RBNM has smallest CE multiplier

Overall0.45

EO0.44

EORB0.53

RBM0.46

RBNM0.78

EONRB0.39

NRBM0.26

NRBNM0.51

NEO0.47

NEORB0.52

RBM0.47

RBNM0.52

NEONRB0.47

NRBM0.32

NRBNM0.47

Important to know the primary input multiplier: Operating Surplus (OS) Multiplier 2005

• CPO (21) - 0.501• Petroleum

Refinery (44) – 0.527


• Semi-conductor devices (74) - 0.241


• Oil Palm (6) – 0.490

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the OS multiplier of the activity

Overall0.49

EO0.48

EORB0.56

RBM0.50

RBNM0.75

EONRB0.42

NRBM0.28

NRBNM0.49

NEO0.51

NEORB0.67

RBM0.47

RBNM0.70

NEONRB0.47

NRBM0.00

NRBNM0.47

Important to know the primary input multiplier: Operating Surplus Multiplier 2010


Refinery (44) - 0.647




• Oil Palm (6) – 0.699

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the OS multiplier of the activity

Discussion

Operating surplus (OS) multiplier has increased slightly from 2005 to 2010

NEO has bigger OS multiplier NEORB has bigger OS multiplier in 2010

Overall1.87

EO1.86

EORB1.95

RBM2.12

RBNM1.37

EONRB1.82

NRBM1.75

NRBNM1.88

NEO1.89

NEORB1.68

RBM2.09

RBNM1.60

NEONRB1.91

NRBM2.30

NRBNM1.91

Important to know the primary input multiplier: Output Multiplier 2005


Refinery (44) – 2.079




• Oil Palm (6) – 1.545

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the output multiplier of the activity

Overall1.75

EO1.77

EORB1.94

RBM2.09

RBNM1.42

EONRB1.65

NRBM1.44

NRBNM1.75

NEO1.66

NEORB1.43

RBM2.07

RBNM1.35

NEONRB1.72

NRBM0.00

NRBNM1.72

Important to know the primary input multiplier: Output Multiplier 2010


Refinery (44) – 1.716

• Crude Oil & Natural Gas (13) - 1.188



• Oil Palm (6) – 1.337

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the output multiplier of the activity

Discussion

Output multiplier has decreased from 2005 to 2010 – from 1.87 to 1.75

NEO has larger output multiplier than EO in 2005; but in 2010 the output multiplier for EO is larger than NEO

Important to know the primary input multiplier: Imported Commodity Multiplier 2005

• CPO (21) – 0.238 • Petroleum

Refinery (44) – 0.391

• Crude Oil & Natural Gas (13) -0.105



Overall0.37

EO0.41

EORB0.33

RBM0.40

RBNM0.13

EONRB0.45

NRBM0.63

NRBNM0.28

NEO0.22

NEORB0.18

RBM0.26

RBNM0.17

NEONRB0.23

NRBM0.34

NRBNM0.23

Important to know the primary input

multiplier:

• Oil Palm (6) – 0.152

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the imported commodity multiplier

of the activity

Important to know the primary input multiplier: Imported Commodity Multiplier 2010


Refinery (44) – 0.270




Overall0.30

EO0.33

EORB0.31

RBM0.36

RBNM0.14

EONRB0.34

NRBM0.58

NRBNM0.22

NEO0.20

NEORB0.15

RBM0.33

RBNM0.13

NEONRB0.20

NRBM0.00

NRBNM0.20

• Oil Palm (6) – 0.127

NOTE: Number in parentheses represent the number of sectorNumber in italics represent the imported commodity multiplier

of the activity

Discussion

Import multiplier over time period has decreased EO has bigger multiplier Non--Resource base multiplier bigger than resource base RBM bigger than NRBM RBNM is smallest in both EO and NEO

Policy Implications

It is necessary to increasing participation in GVCs: VA for 74 and 75 low; but VA for 21 high

Multiplier lowest for 74 and 75 It is crucial to increase VA to ensure economic growth Sophistication index in those products is low While ideally we should aim for high ranked in both VA and

sophistication index of our exports, most of ours are high in VA but low in sophistication index (normally found in primary commodity) or worse still low in both (normally found in E&E and wearing apparels).

Productivity and technological sophistication should be upgraded If above not done, then there will be participation in GVCs without

much gain to the country that hosts GVCs

Policy Implications

Strategies taken in Malaysia to increase benefit from participation in GVCs:– Fostering environment for knowledge-intensive production– Enhancing investment incentives, including those for FDI– Upgrading human capital by reforming the labor market and its

supply side, the education sector– Attracting knowledge-intensive and technology-intensive

investments and discouraging labor-intensive investments– Encouraging technology transfer– Enhancing SME development for a more sustainable and

inclusive industralization– Setting up science and technology parks

Conclusion

Industrial and trade policy should be viewed as part and parcel of national economic policy, especially with regards to value creation.

Fragmented production networks and global value chains (GVCs) characterize trade and investments today

Key sectors in the economy may be based on factor endowments in determining comparative advantage, which under dynamic setting can be created through structural reform.

While structural reform is always relevant at all time, phasing out its implementation and prioritize amongst its varieties is more critical

It is not enough to promote a country to participate in GVCs whose economic and social implications must also be looked into

While VA is important in ensuring economic growth product sophistication will ensure sustainability in economic development and growth

THANK YOU

10 th _ 11 th october 2015 tehran, iran,. introduction background methodology findings policy...

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