Indonesian palm oil industry (Palm tree plantation growing vast in Thailand)
Image: helivideo via iStock photo.

China and Indonesia’s Experiences in Global Value Chain Participation

More nuanced than the ‘East Asian Miracle’ for the region, individual country experiences point to differences in GVC participation since the mid-1990s.

A large part of the ‘East Asian Miracle’ can be attributed to the region’s participation in trade. Much of this trade takes place within global value chains (GVCs). One of the many ways to elucidate East and South East Asian economies’ participation in GVCs is by looking at their intermediate shares in manufactured imports and exports.

Generally, East and South East Asia have a larger share of imported intermediate inputs (higher backward participation) and a lower share of intermediate goods (lower backward participation) than other developing regions. In other words, East and South East Asia tends to use more foreign inputs for production processes than other developing regions and also provides fewer inputs for foreign firms than other countries and regions. 

The differences can be explained by the type of trade the regions are engaged in. Regions such as North and sub-Saharan Africa are active in resource trade, exporting substantial amounts of resource-based manufactured goods such as fuels and minerals (which are widely used as inputs for production) and thus have higher forward participation in GVCs than other countries or regions. In comparison, East and South East are more active in processing trade, focusing primarily on importing parts and components for final assembly. This is further reflected in a comparison between their intermediate imports and intermediate exports: East and South East Asia import more and export fewer intermediates, whereas North and sub-Saharan Africa export more intermediates and import fewer. 

The experiences of individual countries within the East and South East Asia region are obviously much more heterogeneous. This can be illustrated by the case of China and Indonesia, the region’s two most populous economies. For a long time, Indonesia’s gross national income per capita was higher than China’s. In 1997, just before the Asian financial crisis, Indonesia’s GNI per capita stood at US$ 1,256 (current US$) compared to China’s, which amounted to US$ 758. In the aftermath of the crisis, Indonesia’s income was more than halved to US$ 533; it was overtaken by China, with a GNI per capita of US$ 802. Indonesia’s growth soon recovered and its income continued rising to reach US$ 3,725 in 2017. During that same period, China’s GNI per capita surged ahead to reach US$ 8,658. The income gap between the two countries widened. 

Telecommunications assembly
Image: sompong_tom via iStock photo.

Explanations about the countries’ distinctly different growth trajectories range from political contexts to economic governance. Part of the answers can be found in the way the two economies have participated in GVC trade. In 1995, China’s primary manufacturing GVCs (reflected by its key export industries) were apparel, textiles and leather and footwear – all of which are considered low-technology, labour-intensive industries. The key manufacturing GVCs for Indonesia were wood products, textiles and food and beverages – which are likewise low-technology but also resource-based industries.

Replicating the success with its earlier integration into low-technology GVCs, China broke into high-technology GVCs by providing abundant low-cost labour to assembly operations. Meanwhile, Indonesia capitalized on its advantage in agricultural production—mostly oil palm cultivation—and to a lesser extent petroleum production, to produce oils and fats (which fall under food and beverages) and chemicals.

By 2016, China had established a significant presence in a number of high-technology GVCs. China became the world’s largest exporter in telecommunications (38 per cent of world total), machinery and appliances (17 per cent of world total), and office equipment (50 per cent of world total).

Industry share of total manufactures exports (2016)

Global market share of telecommunications exports

Indonesia’s key GVCs shifted to food and beverages, chemicals, and apparel, all of which are low technology industries with the exception of chemicals. In other words, Indonesia remained deeply integrated in low technology industries. Indonesia became the world’s 11th largest exporter of food and beverages (3 per cent of world total), the world’s largest exporter of palm oil products with a market share of above 50 per cent and the world’s 14th largest exporter of chemicals (2 per cent of world total). 

Industry share of total manufactures exports (2016)

Global market share of food and beverages exports

China’s forward participation in telecommunications GVCs – as reflected by its value added embodied in telecommunications exports by foreign countries (as a percentage of China’s telecommunications exports) – was fairly stable between 1995 and 2011, at close to 6%. The major countries which used China’s value added to produce for exports were the US, South Korea and Mexico.

Domestic value added in foreign exports (% of domestic exports)

Domestic value added in foreign exports (by user country, 2011)

The changes in China’s backward participation in telecommunications were pronounced. China has always had high backward participation as it imported most of the inputs needed for assembly. The share of foreign value added in its telecommunications exports was already high at 67 per cent in 1995. It rose continuously and peaked at 76 per cent in 2003. Since then, the share of foreign value added in China’s telecommunications exports gradually declined to 55 per cent in 2011 – with the main sources of foreign value added being Japan, South Korea and the US. The declining share of foreign value added in China’s telecommunications exports suggests that a pool of domestic suppliers has since begun to emerge to provide more local inputs for production. If this development persists, it may well signal China’s move further away from simple assembly operations and evolution into a supplier of more sophisticated inputs in the global telecommunications industry.

Foreign value added in domestic exports (%)

Sources of foreign value added in domestic exports (2011)

Indonesia’s forward participation in food and beverages GVCs – as reflected by its value added embodied in food and beverages exports by foreign countries (as a percentage of Indonesia’s food and beverages exports) – increased over time and rose from below 5 per cent to 7 per cent between 1995 and 2016. This very likely reflected Indonesia’s growing supply of oils and fats products as inputs in global food industries.

Domestic value added in foreign exports (% of domestic exports)

Indonesia’s backward participation in food and beverages GVCs, measured by its share of imported intermediate inputs, rose from below 50 per cent to over 60 per cent between 1995 and 2016. Much of this, however, was due to increased food imports such as sugar, cereals and animal feed (which are mostly considered to be intermediates) for production that caters to domestic consumption.1 Indonesia’s backward participation in food and beverages GVCs – measured by the foreign value added share in its exports – in fact was fairly stable at around 9 per cent between 1991 and 2011. This was understandable given that the oils and fats industry used mostly local inputs from the oil palm industry.  

Domestic value added in foreign exports (as % of manufactures exports)

The Indonesian experience should not be taken to imply that having strong resource-based industries will necessarily obstruct industrial development (an argument that has been made by observers of African economies). The outcomes are instead very much determined by a number of factors, including investment in domestic technological capabilities, education and training, policy frameworks and institutional capabilities, as concluded by a study on several southern African economies.2

The more important point emerging from a comparison of China and Indonesia is that GVCs are made up of multiple industries and each industry has inherent technology characteristics. For developing countries seeking to industrialize in the age of globalization, focusing on labour- or resource-intensive industries and segments is an important first step to participate in GVCs. Nonetheless, this is not in itself the end goal. Continuous upgrading is a must and not a choice if a country were to achieve sustained economic development. Upgrading inevitably requires continuous development of higher technology downstream, upstream or lateral industries at some point. The extent to which such development occurs has a great impact on growth, as demonstrated by the experiences of China and Indonesia.

References

  1. Reuters. (2014) Indonesia seeks ways to tame hunger for food imports.
  2. Fessehaie, Judith and Rustomjee, Zavareh (2018) Resource-based industrialisation in Southern Africa: Domestic policies, corporate strategies and regional dynamics. Development Southern Africa, 35:3, 404-418.