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Industrial building exterior. (Image: Waldemar Brandt via Unsplash)

Building socio-economic resilience through industrial capabilities

What can we learn from the COVID-19 pandemic?

By Antonio Andreoni and Alejandro Lavopa

COVID-19 has had a tremendous impact on economic activity, and after two years of data collection and analysis, we can now quantify the size of the shock. World gross domestic product (GDP) was growing at just over 3 per cent annually in 2018; this value slowed to 2.8 per cent in 2019, and then shrank by 3.1 per cent in 2020. Despite a rapid recovery in 2021 (with a growth rate of 5.9 per cent), the level of world GDP is still far below that projected before the pandemic. The difference between the observed and projected values equates to a real economic output loss of nearly USD 6,000 billion in 2021 (see figure below).

COVID-19 had tremendous impact on socioeconomic activity

Note: Projections based on IMF World Economic Outlook data. Pre-pandemic projection refers to data published in the October 2019 edition. The latest available projections refer to data published in the October 2021 edition.

Source: IDR 2022

These global numbers hide a wide range of trajectories, with disparities evident between high-income economies, on the one hand, which reported an average output shortfall of 5.2 per cent in 2021 (see blue bubble in the figure below), and developing economies, on the other, where the average drop ranged from 7.6 per cent (low-income countries) to 8.5 per cent (lower middle-income countries). The variation is even more pronounced within each of these income groups, as reflected in the wide dispersion of cases along the vertical axis of the figure below. For example, some countries within the lower middle-income grouping (Myanmar and Cabo Verde) experienced shortfalls of 20 per cent or more relative to their pre-pandemic projected GDP for 2021, while others in the same group (Egypt, Nigeria and Pakistan) witnessed declines of less than 5 per cent. The same is true for all other income groups.

This impact, however, was very diverse across countries

Note: Output loss is defined as the percentage change between the pre-pandemic projected level of GDP for the year 2021 and the latest available projection. In the horizontal axis, 1 stands for “Low-income”, 2 for “Lower middle-income”, 3 for “Upper middle-income”, and 4 for “High-income”.

Source: Authors’ elaboration based on IMF World Economic Outlook data.

In efforts to disentangle this cross-country variation, country characteristics, such as demographic structure and policy responses, including public health measures and financial support for businesses, have gained a fair amount of attention. One factor that has not received enough attention is an economy’s underlying resilience and, specifically, the contribution of its industrial capabilities. UNIDO’s Competitive Industrial Performance (CIP) index can be used as a rough proxy for a country’s industrial capabilities. In a synthetic way, the index measures each country’s effectiveness in engaging with industrial production. Empirical evidence shows that countries with above-average industrial capabilities—as proxied by the CIP—were less impacted by the pandemic (see figure below). Even after controlling for country characteristics that are likely to shape the pandemic’s impact on economic activity, industrial capabilities continue to prove an important factor in buffering against shocks.1

Industrial capability as a buffer to output shocks

Note: This figure presents simple averages. Output loss is defined as the percentage change between the pre-pandemic projected level of GDP for the year 2021 and the latest available projection. Within each income group, low and high industrial capabilities are defined by comparing a country’s level of UNIDO’s Competitive Industrial Performance index against the average level of the corresponding income group.

Source: Authors’ elaboration based on IMF World Economic Outlook data and UNIDO CIP index data.

But what are industrial capabilities, and which capabilities bolster socioeconomic resilience? Broadly speaking, industrial capabilities comprise embedded personal and collective skills, productive knowledge and experiences firms need to be able to perform tasks and undertake improvements in manufacturing production. The resilience of countries and their industrial ecosystems relies on two specific subsets of such capabilities: (i) robustness to resist, absorb and accommodate shocks in the short term, and (ii) readiness to adapt, transform and recover in the medium term. Robustness capabilities include domestic availability of resources and technology, some degree of redundancy in the supply chain (e.g. access to multiple and diversified input sources) and the flexibility to repurpose these capabilities to accommodate new demands and limitations. Readiness capabilities include the ability to adapt to new forward-looking strategic directions, reorienting production through innovation, technological advancement and risk-reward governance arrangements.

Socioeconomic resilience is not only determined by industrial capabilities; it also hinges on support from public sector capabilities. Indeed, countries that exhibited the highest degree of resilience to the pandemic are those that built resilience into their economies over several years and that have aligned their government capabilities with their industrial capabilities throughout this process. Government resilience capabilities can further be divided into capabilities that support the robustness of socio-economic systems, and those that support readiness to respond. Robustness capabilities are crucial for coordinating and implementing containment measures, while government readiness facilitates the shift towards recovery.

Looking specifically at the case of the pandemic, government robustness capabilities included the ability to provide reliable, responsive and coordinated care, treatment and preventive interventions. Viet Nam is one of the most striking examples of a country that introduced effective preventive and containment measures. Another key robustness capability was balancing trade with national security, ensuring strategic control over critical technologies and production in areas such as vaccines, medical devices and personal protective equipment (PPE). The launch of challenge-driven initiatives to scale up the production of ventilators in both advanced and middle-income countries such as South Africa proved to be an effective coordinating mechanism for public-private cooperation.

Readiness capabilities included a more complex set of functions related primarily to unleashing innovation and the shaping of markets. In the case of the pandemic, these included, among others, the establishment and support of public-purpose-driven research institutions, market creation through public procurement, public finance for innovation and industrial restructuring, and facilitating intersectoral cooperation. The existence of public-purpose-driven institutions operating along the entire innovation–manufacturing chain, such as in the case of Fiocruz in Brazil, has allowed countries to effectively scale up vaccine production while innovating on vaccine platforms.2

Ultimately, the pandemic’s socioeconomic impact in a given country largely depended on the extent to which these two sets of capabilities—industrial and government—were present and aligned with each other. By the same token, there are several possible pathways out of a crisis depending on the country’s starting point.

Pathways out of a crisis

Andreoni Lavopa IDR art 1 fig 4 -2
Pathway 1–High government capability, low industrial capability: Countries can leverage government institutions, infrastructure, financing and procurement to mobilize resources and rapidly boost industry’s robustness. This sets the foundation for industrial recovery and the development of increasingly sophisticated government capabilities based on experimentation and learning-by-doing. Pathway 2–High industrial capability, low government capability: Countries can develop sectoral responses to crises by strengthening the connections between their public institutions and their industrial sectors. Partnerships can foster the transfer of technologies and expertise to the public sector, cultivating the development of capabilities in procurement, testing, prevention and logistics. Pathway 3–High industrial capability, high government capability: A robust socioeconomic system at the onset of a crisis predicts better recovery from external shocks, but adaptation should not be taken for granted. This advantageous baseline should be actively leveraged to ensure continued transformation and resilience after the crisis.

Countries with both low government capabilities and low industrial capabilities—the most frequent combination in developing economies—run the risk of being trapped in a vicious cycle where one crisis leads to another, but this is not an inevitability. It only highlights the point that sustaining and strengthening investments in industrial and government capabilities today will be key to building resilience against future crises.

While shocks, by definition, are acute, resilience unfolds over time. It requires continuous financial investment in key strategic assets, an accumulation of systemic capabilities, market creation and learning from experimentation. There are pockets of capabilities nested in both government and industrial sectors, even in developing countries, that can be leveraged to increase the overall robustness of the socioeconomic system. Doing so requires long-term commitments and investments that will not necessarily pay off in the short run, but may well determine an economy’s survival through the next crisis.

This piece is part of the IAP IDR2022 series, based on UNIDO's flagship Industrial Development Report (IDR) 2022 and the background paper produced by Antonio Andreoni. 

  • Antonio Andreoni is Associate Professor of Industrial Economics at University College London and Visiting Associate Professor in the Fourth Industrial Revolution, SARChI Industrial Development, University of Johannesburg.
  • Alejandro Lavopa is Research and Industrial Policy Officer at the Industrial Policy Research Unit (IPR) of the United Nations Industrial Development Organization (UNIDO).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

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