"In-out-in again" strategy: a possible driver of the industrialization process for middle-income countries

Industrial indicators display an inverted U-shaped relationship with income levels across both developed and developing economies. However, there is growing evidence that the deindustrialization process is accelerating in less developed countries, giving rise to the phenomenon of premature deindustrialization. This process has been shown to be one of the main drivers of growth slowdowns, particularly in middle-income economies, preventing countries from catching up and leaving them trapped in the so-called middle-income trap. Some East Asian countries, such as South Korea and Taiwan, have nevertheless managed to avoid this outcome by engaging non-linearly in global value chains, following a pattern often referred to as the ‘in–out–in again’ hypothesis. This paper provides an empirical assessment of how this alternative industrialization pathway can shield economies from the risk of premature deindustrialization, sustaining growth in middle-income countries. Using a panel of 47 emerging and developing economies over the period 1995–2020, we examine how this discontinuous engagement in global trade affects manufacturing employment and output shares, as well as countries’ capacity to move up the value chain and export more complex products. Our findings suggest that the ‘in-out-in again’ global value chain insertion pattern has been an effective mechanism for avoiding the middle-income trap in East and South Asian economies, while offering little indication of its role in preventing premature deindustrialization.