Industrial development for sustained economic growth

SIDS still at early stages of structural transformation

The COVID-19Infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes a coronavirus disease called COVID-19. crisis exposed the risks of an economic model reliant on cross-border touristic or financial services with limited linkages to the rest of the economy. Progress on structural transformationStructural transformation can be broadly defined as the reallocation of economic activity across three broad sectors, agriculture, manufacturing and services, which accompanies the process of economic growth. -—
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—- It usually refers to the transfer or shift of production factors — especially labour, capital and land — away from activities and sectors with low productivity to those with higher productivity, which are typically different in location, organization and technology -—
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—- towards sustainable industrialization would help SIDSsmall island developing States (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992.
More information on UNCTAD official page. achieve a more stable economic trajectory and contribute to a greater integration with the global economy.

The share of MVAManufacturing value added (MVA) is the net-output of all resident manufacturing activity units. It is obtained by adding up their outputs and subtracting intermediate inputs -—
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—-. in GDPGross domestic product (GDP) is a marker of structural transformation – an indication of how much an economy has transitioned from primary activities and resource extraction to higher value added activities. Persistently low shares of MVA are, therefore, a concerning finding in developing economies. Classic economic theory and consistent empirical evidence have established manufacturingManufacturing can broadly be understood as "the physical or chemical transformation of materials, substances, or components into new products" -—
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—-, consisting of section D in ISIC Rev. 3 -—
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—-. as a stepping stone in economic development and higher living standards for the population, given that this sector creates unique opportunities for capital accumulation, economies of scale, rapid technological progress, productivity growth and integration in global production networks -—
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—-. Because of its extensive linkages with other sectors and its large multiplier effect -—
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—-, manufacturing is considered an essential engine for growth. According to classic structural transformation theory, the relationship between the share of manufacturing in the economy and the level of economic development (measured as GDP per capita) follows an inverted-U shape: income per capita and the weight of manufacturing raise in tandem as output shifts from primary activities and resource extraction to manufacturing; at a later stage, however, this relationship inverts as richer economies specialize on higher-value added manufacturing and tertiary activities.

By 2019, as shown in figure 1, the weight of manufacturing in the economy of developing economies far exceeded that registered in developed economies. Even if this development can be explained in large part by the industrial performance of China, other economies of this group have also attained considerable progress in structural transformation. The weight of manufacturing in developed economies has declined relative to emerging and developing economies. On the other hand, the manufacturing sector in SIDS represented only 8.6 per cent of GDP, on average, lower than for LDCsLeast developed countries (LDCs) are low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets -—
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—-. and LLDCsLandlocked least developed countries (LLDC). In the Caribbean SIDS, the share of MVA (8.9 per cent) exceeded the SIDS’ average, while in the Pacific SIDS it was far below (7.1 per cent).

Figure 1. Share of MVA in GDP in SIDS and other groups of economies (SDGSustainable Development Goals (SDG) 9.2.1), 2019

(Percentage of MVA)

Source: UNIDOUnited Nations Industrial Development Organization calculations based on data from -—
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MVA per capita, another structural transformation indicator¹, shows SIDS in a slightly better light (see figure 2). Given their small population, the levels were higher in SIDS than in other developing economies. However, while other developing countries registered rapid progress in this indicator, MVA per capita has declined in SIDS almost every year since 2008, when it stood at US$741 (in 2015 prices) compared to an estimated US$567 in 2020. Manufacturing had a larger presence in the Caribbean SIDS, although the decline was rapid there as well. Pacific and Atlantic and Indian Ocean SIDS exhibited a more stable MVA per capita than SIDS in the Caribbean, although at significantly lower levels. In 2020, MVA per capita in SIDS ranged from a maximum of US$2 350 (in constant 2015 prices) in Trinidad and Tobago, to a mere US$18 per person in the Federated States of Micronesia.

Figure 2. MVA per capita in SIDS and other developing economies (SDG 9.2.2)

(US$, constant 2015 prices)

Source: UNIDO calculations based on data from -—
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Note: Figures for 2020 are estimates from -—
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Large variation among SIDS in manufacturing employment

Manufacturing makes a significant contribution to employment in some SIDS, while in others only a fraction. Most SIDS are well below the world average when looking at SDG indicator 9.2.2, share of manufacturing in total employment. Over 50 per cent of SIDS are also below the LDCs’Least developed countries (LDCs) are low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets -—
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—-. and LLDCs’ average (see figure 3).

Only Tonga and Kiribati exceed the world average, with 20 per cent and 14 per cent, respectively. In Tonga, for instance, manufacturing is an important employer. In 2017, over 40 per cent of these jobs were in the manufacture of food products and beverages, while non-metallic mineral products and recycling and other manufacturing both accounted for 20 per cent -—
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The share of manufacturing in total employment is smallest in the Marshall Islands at below 1 per cent (data for 2010) and at 2 per cent in Vanuatu (data for 2010) and the Federated States of Micronesia (data for 2014). Rather than on manufacturing, the livelihood of population depends on agriculture in Vanuatu and in the Marshall Islands on services. SIDS’ increasing reliance on the service sectorService sector includes according to ISIC Rev. 3 G-P: wholesale, retail trade, restaurants and hotels (ISIC G-H), transport, storage and communications (ISIC I) and other activities (ISIC J-P) -—
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—-. is discussed as part of Productive capacity.

Figure 3. Manufacturing employment as a proportion of total employment (SDG 9.2.2)

(Percentage)

Source: UNCTAD calculations based on data from -—
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Note: Data represent the latest available year: 2019 data for Saint Lucia, Seychelles, Barbados, Jamaica, Cabo Verde and Mauritius; 2018 data for regional aggregates and Tonga; 2017 data for Samoa; 2016 for Tuvalu, Fiji, Timor-Leste and Trinidad and Tobago; 2015 data for Kiribati; 2014 for Micronesia (Federated States of), Comoros and Maldives; 2013 for Solomon Islands; and 2010 for Vanuatu and Marshall Islands.

SIDS concentrate on resource-based manufactures

Not all manufacturing activities contribute to structural transformation and economic growth to the same degree. Industries that produce more technologically advanced manufactures contribute with higher value added per worker and lead to better opportunities for accelerating technological progress, creating positive spillovers to other sectors and supporting integration with world markets.

Even though data to study manufacturing by technological level are missing for many SIDS, it is possible to analyze exports by technological content as a proxy for manufacturing output. To this end, exports are classified to primary products and four categories of manufactured goods: resource-based, low technology, medium technology and high technology. The higher the share of exports on the higher categories of technological complexity, the stronger the indication that the economy has progressed in its structural transformation.

SIDS’ exports are concentrated primarily on resource-based manufactures (see figure 4) with the lowest level of technological content. Medium and high-tech manufactures represent 20.6 per cent of exports, compared to 47.8 per cent in all developing economies and 53.1 per cent in developed countries. The Caribbean SIDS have a technologically more advanced export profile, with 25.5 per cent of their exports classified in the medium and high category. The share in the other two SIDS groups is slightly above ten per cent.

Figure 4. Distribution of exports by technological category, 2019

(Percentage)

Source: UNCTAD calculations based on data from -—
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Note: For a description of the product classification by technological category, see -—
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The relatively low weight of manufacturing in the SIDS’ economic output and their high concentration on relatively low value-added, resource based and technologically less complicated manufactures in their exports, as evidenced by the figures above, indicate that SIDS still have a long way to go in terms of structural transformation.

Structural transformation through manufacturing still the path to sustained growth

Some research findings have questioned the role of manufacturing as a bridge to economic development. In many advanced economies, manufacturing has started to decline relative to other sectors (i.e., deindustrialization). As mentioned above, this finding can be explained as a natural process in structural transformation, but it has also been partially caused by measurement issues, such as changes in business structures, outsourcing and “servitizationServitization is the process whereby the relative importance of service offerings from a business unit increases, leading to a greater service business orientation. It refers to the process where the production and sale of a product is increasingly bundled with services such as leasing and other financial services, maintenance and repair, training, customer support agreements and outcome contracts. From the point of view of measurement, this means that an increasing share of value added originates from service activities, possibly leading to a classification of an establishment as a service provider. -—
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—-. This process has also been identified in some developing economies, but mostly triggered by policy failures -—
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Some highly-specialized, small-size economies, including some SIDS, have bypassed the traditional process of structural transformation through manufacturing and have achieved sustained economic development based on resource extraction or services in the financial or tourismTourism refers to the activity of visitors -—
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—-. International tourism expenditure is often approximated by the sum of travel services and transport of passengers, reported under balance of payments statistics (see Trade in services). Transport of passengers not considered, tourism represents a subset of travel, as some travelers, such as border-workers, travel for regular work, as they are holding employment contracts outside their usual residential environment. Activities of border-workers and similar travelers do not belong under tourism. -—
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—-. However, this has also created reliance on a limited number of sectors or markets and could result in high vulnerability to shocks, caused for example by natural disasters, shifts in global financial flows, changes in international regulations or downturns in international travel, as witnessed during the COVID-19 crisis. A more diversified economic structure usually helps improving stability and sustaining long-term economic growth. Manufacturing has an important role to play in this diversification.