UNIDO Signposts the Future of Industrialisation

The United Nations Industrial Development Organisation (UNIDO) in its 2022 Industrial Development Report said three megatrends: digitalisation, greening environment and the emergence of Asia as the global industrial heartbeat, would dictate the future of global industrialisation, writes Dike Onwuamaeze

The United Nations Industrial Development Organisation (UNIDO) has called on the international community to actively engage in building a better post-COVID-19 future.

This call is contained in its Industrial Development Report (IDR) 2022, titled, “The Future of Industrialisation in a Post-Pandemic World.” It also called for action from the international community to support an inclusive, sustainable and resilient industrial recovery.

Among the key messages of the IDR is that countries need to draw lessons from their pandemic experiences as they plan their economic recovery and industrialisation pathways in a post-pandemic period.

They also need to take into account three megatrends that are expected to shape the future of industrialisation globally. These trends are comprised of digitalisation and automation of industrial production, a shift in economic (manufacturing) power towards East Asia, especially China and the greening of industrial production in order to mitigate the effects of climate change. These trends, according to the IDR, have been accelerated by the COVID-19 crisis:

The report added that Inclusive and Sustainable Industrial Development (ISID) in a post-pandemic world would require, more than ever, the development of firm-level production capabilities and national ecosystems that could support the absorption and creation of new technologies.

Research commissioned for this report also identified that these three megatrends and the deployment of Advanced Digital Production (ADP) technologies would affect essentially all spheres of business development and deeply change the competitive advantages of firms and nations.

It noted that, “global economic power shifts, especially the emergence of Asia as a dominant hub of global industrial production and China’s structural transformation towards a knowledge-driven highincome economy will imply a major restructuring of trade flows and global value chains.

“Similarly, the greening of industrial production to meet the need to reduce environmental footprints, and particularly to decarbonise economies, for radically different business models and systemic transformations with far-reaching effects on the positioning of Developing Emerging Industrialise Economies (DEIEs) in the world economy.”

Structural economic change

The report noted that these megatrends are interrelated in multiple ways and together would shape the direction of structural economic change and of industrial development in particular. “Some industries and business models are declining in the shadow of these trends, whereas others are emerging and expanding. This creates opportunities as well as threats for all economies; yet how this plays out depends in part on existing economic structures and coping strategies,” the IDR said.

The report noted that several macroeconomic indicators have shown that a new centre of economic gravity is in the making. Indeed, one of the most significant socioeconomic transformations over the last decade has been the increasing weight of Asia in the global economy. The Asian contribution to global GDP has been growing rapidly over the last decades, which has been boosted by China’s spectacular performance. Additionally, current projections indicate that Asia’s current share of global GDP will double by 2050, reaching 52 percent, whereas the share of all other world regions is set to decline.

The report said that this trend is also observable when analysing the power shifts in the global manufacturing sector specifically. It said: “Until the early 1990s, the main manufacturing powers were located in North America and Western Europe, with industrialised economies (IEs) representing almost 80 percent of global manufacturing value added.”

Since then, however, there has been a steady redistribution of manufacturing towards developing countries. The latest available estimates indicate that DEIEs are now responsible for 49.1 percent of worldwide manufacturing value added. This is, to a large extent, a result of the expansion of manufacturing activities in Asia. China has been at the forefront of this development: its share of global manufacturing value added jumped from 4.0 per cent in 1990 to 31.3 per cent by 2020, making it the world’s largest manufacturer.

Conversely, the weight of Latin America declined from 7.8 per cent in 1990 to only 4.7 per cent in 2020, while the share of developing economies in Europe also shrank, from 1.9 per cent to 0.7 per cent over the same period.

“Africa’s share remained almost constant, contributing to about 2.0 per cent of total global manufacturing output throughout these years,” UNIDO said.

The IDR elaborated on how the greening of the manufacturing landscape would shape the future of industrialisation.

“Moving in parallel with advanced digitalisation and changes in the global structure of production, the increasing greening of manufacturing industries is the third megatrend likely to shape the future of industrialization. This trend is due to the growing recognition of the impact of human activity on the environment and the increasing awareness that environmental externalities should be taken into consideration by the manufacturing sector, which should continue moving towards cleaner, more resource-efficient processes,” UNIDO said.

Currently, three major economic blocs have placed the greening of their economies at the top of their political agendas. In 2019, the European Commission introduced the European Green Deal, which aimed to reach climate neutrality by 2050 within the European Union (EU). In 2021, the United States rejoined the Paris Agreement on climate change and committed to reduce its emissions by about 25 percent by 2025 compared to 2005 levels. Finally, China’s current Five-Year Plan foresees decarbonisation and investment in green solutions and emphasises China’s goal for global leadership in green technologies.

While decisions made by a few IEs may have established key technological and institutional standards so far, developing countries are increasingly committed to environmental issues. Since 2015, they have been investing more in green energy than developed countries, both in absolute and relative terms.

COVID-19 pandemic Devastation

According to the Director General of the UNIDO, Mr. Li Yong, the COVID-19 pandemic has had a devastating impact on economies, societies and people around the globe and also triggered the worst recession since the end of World War II, affecting the livelihoods and incomes of workers, employees and households.

Yong said: “With this urgent appeal, the report hopes to guide recovery post-pandemic and contribute to mobilising the necessary efforts for the achievement of the 2030 Agenda for Sustainable Development (SDGs).

“Never has a twin health and economic crisis spread so quickly and so widely. The progress made to date towards achieving the goals of the 2030 Agenda for Sustainable Development, including the tremendous achievements in global poverty reduction, is under serious threat of being reversed.

“The IDR also articulated concrete steps in this direction. It distinguished between actions to be taken in the short term to alleviate the economic and social effects of the pandemic, and actions to be taken over the longer term, which are geared to building back better through inclusive and sustainable development.”

The IDR 2022 showed that a country’s industrial capabilities and the size of its manufacturing sector constituted two important factors of resilience against the crisis. It stated that countries with stronger manufacturing systems weathered the economic crisis better than the rest.

The report also specified how manufacturing enabled global economy to survive the onslaught of COVID-19 by contributing three important dimensions of resilience. It said: “Manufacturing contributed to the sustenance of life, helped in tackling emergencies and supported the recovery.”

It said that manufacturing industries were vital to providing essential goods that were critical to life and national security; secondly, manufacturers played a role in supplying goods critical to tackling the emergency itself; and thirdly, the manufacturing sector contributed to the recovery and growth of national economies.

Manufacturing and the SDGs

Furthermore, manufacturing was also a key driver of sustainable development. “Beyond supporting resilience in times of shocks, manufacturing also plays a fundamental role in driving shared prosperity. This sector creates jobs, incomes, innovations and multiplier effects that can also ignite other parts of the economy. For this reason, industrialisation and the achievement of Sustainable Development Goal (SDG) 9 is also key for the achievement of many other SDGs from the UN Agenda 2030,” the IDR said.

The report pointed out that the attainments of 11 SDGs were tied to manufacturing. They are the SDG 2 that focused on “increases in agricultural productivity due to industrial innovation (e.g. new machineries, fertilizers) promote food security;” the SDG 3 that targeted improvements in human health and well-being due to technological progress in industry (like new vaccinations and drugs);” SDG 4 that is rooted on “higher demand for skills in industry improves the quantity and quality of education” and SDG 5 which focused on “higher rates of formal employment improve working conditions of female workers” while SDG 7 projected that “economies of scale and new production technologies increase input efficiency.”

Moreover, SDG10 and 11 stated that industrialisation would foster labour movement and build a middle class by enabling industrial clusters that would “spur innovation and resource efficiency while linking local business with global markets.”
Similarly, SDG 12 and 13 stated that, “green industries and circular economy principles support responsible production and consumption; Uptake of resource-efficient technologies and sustainable energy solutions promotes reduction of GHG emissions while SDG 14 and 15 “green industrial technologies support the sustainable management of water and soils and the reduction of waste.”

Industrial production ecosystem

Whereas some country groups have been deeply shaken by the crisis and show very large declines in industrial production during the worst quarters of the pandemic, other groups have been less affected and industrial production did not fall in those groups as dramatically.

Overall, DEIEs were hit more strongly than IEs, but the heterogeneity within this group was also much larger—ranging from African least developed countries (LDCs), which show very little impact, to India, which shows a decline of more than 40 percent in industrial production after the initial shock of the pandemic.

Labour-intensive industries were more vulnerable to the COVID-19 shock. Moreover, Small and Medium-sized Enterprises (SMEs) in vulnerable industries were much more impacted

The COVID-19 pandemic also had a major but highly asymmetric impact on manufacturing firms. Primary data collected by UNIDO and partners for this report showed a common thread across DEIEs: SMEs have been disproportionally impacted by the shock when compared to large enterprises.

SMEs’ vulnerability puts at risk the achievement of social inclusion. “The deeper impact on SMEs raises large concerns when it comes to social inclusiveness, as this type of firm employs the vast majority of workers in DEIEs.

“Moreover, most marginalised groups, such as women and informal workers, tend to be overrepresented in the labour force of small firms. Thus, if on one hand small firms are important vectors of inclusiveness into the labour market for marginalized groups; on the other hand, a particularly negative impact of the crisis on these firms places a higher risk of job losses on a large share of the labour force, especially its most vulnerable members.”