It has been more than two years since COVID-19 began its inexorable spread across the world. Since the pandemic’s start, a wealth of data on its economic and societal impacts has been collected. Yet many of these impacts are difficult to disentangle from ongoing background megatrends. Global in nature, megatrends are major movements that last several decades and have profound effect on the social, economic and political spheres. They are driven by long-term economic, social and political forces that are resistant to short-term external influence, and as such are not expected to be fundamentally altered by the pandemic. On the other hand, as COVID-19 moves from a crisis to becoming an ongoing public health management issue, a clearer picture emerges of how the pandemic exacerbated or attenuated the speed of these megatrends, and where they might lead us in the future. In the sphere of industrial development, three megatrends deserve particular attention.
Digitalization and automation of production
Technological innovation affects all spheres of business development and considerably alters firms’ and nations’ competitive advantages. The digitalization megatrend encapsulates a range of technological changes, from the emergence of powerful online platforms to the diffusion of smartphones and related consumer services, 3D printing, factory automation and blockchain technology in production. Many of these innovations are mutually reinforcing. They are profoundly transforming the way economies are organized, and include a reduction in the direct need for labour, changes to working conditions, decreased transaction costs and the facilitation of the exploitation of economies of scale. The growth of robotics in industrial production (see figure below) is indicative of the overall progression of this megatrend over the last two decades.
This megatrend was affected in two specific ways by the outbreak of the pandemic: on the one hand, social restrictions accelerated the trend towards online shopping, while the revealed vulnerabilities of global value chains (GVCs) intensified the debate on automation and reshoring, on the other (see figure below). The impact on digitalization has been uneven, however. Successful digitalization generally depends on the industrial sector’s absorptive capacity, implying the need for co-investment in skills and infrastructure development, supportive industrial policies and a healthy business environment, thereby raising the barriers to entry. Given these prerequisites for “capturing the digital dividend”, it is not surprising that most developing economies lack the skilled labour and/or the institutional and financial means to deploy these new technologies to their best advantage, hence the uneven speed of COVID responses may further deepen the existing digital divide.
As illustrated in Figure 2, only a small percentage of firms (in red) would consider reverting to pre-pandemic production methods, while digital innovations—such as online trading and automation—are likely to emerge even stronger from the pandemic.
Global economic power shifts
China represents the exception to the developed–developing economy dichotomy, and recovered relatively quickly due to the government’s rapid response at the onset of the pandemic. This is emblematic of another industrial megatrend, which has witnessed a substantial shift in economic power over the last few decades, especially towards East and Southeast Asia. The figure below illustrates the steady rise in the share of global manufacturing value added (MVA) contributed by developing and emerging industrial economies (DEIEs) in the Asia-Pacific region, even hinting at an acceleration since the beginning of the pandemic.
The pandemic is likely to reinforce these previous trends. The relative speed of recovery in this region and the high COVID-19 incidences delaying recovery in other regions has widened the existing gap. Additionally, private and government debt levels have increased since the pandemic started, especially in low-income countries, which have been slow to recoup from the pandemic. This may negatively impact growth prospects and reallocate resources away from investment in structural transformation, resulting in “laggard” economies falling further behind.
Another interesting development is the pandemic’s effect on the shift towards greener industrial production. Manufacturing has been rapidly decarbonizing over the last decade (see figure below); there are some signs that the pandemic has slightly accelerated this trend.
This relationship is mostly indirect and difficult to pinpoint, but several observations are encouraging. For example, the crisis has re-emphasized the cost of dependence on oil exports, and thus the need for economic diversification in oil-dependent economies. Moreover, major policy packages have been initiated as part of stimulus programmes to accelerate green hydrogen production, which may have many benefits for emerging and developing countries. While the impacts of these developments are not yet fully understood, the pandemic has at least accelerated the trend towards remote working, reducing building- and transportation-related emissions.
The future of industrial development
Although COVID-19 is sometimes touted as a turning point in various spheres of life, the reality is that it has not fundamentally altered pre-pandemic megatrends, but accelerated some. While the pandemic has had a severe impact on the world economy, it will not fundamentally affect ongoing megatrends. The table below summarizes some of the areas in which the pandemic might have more durable effects, potentially changing the long-term course of structural transformation and creating new challenges and opportunities for DEIEs.
Tangible COVID-19 effects on structural change and their implications for DEIEs
The megatrends offer new avenues for industrial development, but their potential for success depends on a number of country-specific conditions. In this context, strategies for developing an inclusive and sustainable industrial sector should continue along the path of building digital capabilities and absorptive capacities, fostering economic resilience through diversification and investing in technologies that decouple industrial and economic development from environmental harm.
This piece is part of the IAP IDR2022 series, based on UNIDO's flagship Industrial Development Report (IDR) 2022 and its background papers.
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).