It is not unreasonable to assume that the COVID-19 pandemic’s economic impact must have been particularly severe in least developed countries (LDCs) due to, among others, their reduced resilience and diminished capacity to respond to shocks. LDCs have faced reduced external demand, falling prices of key commodities such as oil, a dramatic decrease in tourism activity, weakening foreign direct investment (FDI) and debt challenges1. While more developed countries are rapidly building back better, LDCs could fall behind due to both financial restrictions and being sidelined in international production networks2. We examine the COVID-19 pandemic’s impact on industry in LDCs to inform the debate on what can be done to build industries forward differently once the pandemic winds down.
Trends in industry in LDCs
Data from UNIDO’s Index of Industrial Production (IIP)3—which is available for eight LDCs only4—suggest a pronounced slump in manufacturing production in early 2021, with an average drop of 20 index points. However, industrial production had already bounced back to pre-COVID levels by the second half of 2021. Yet the picture is uneven across countries (figure below): while the industrial output of Niger, Senegal and the United Republic of Tanzania seems to not have been affected, the downturn was quite pronounced in Bangladesh, Nepal and Rwanda.
When comparing industrial performance by income group for the full set of 101 countries for which data are available (figure below), we find that all country groups experienced declines of 20 points or more. The decrease was less marked in low-income countries, however.5 All country groups recovered following this downturn, though this trend has recently reversed in low-income countries.
Industry in LDCs seems to have fully recovered. We should, however, be cautious in drawing such conclusions for several reasons. Small and medium enterprises (SMEs) and informal businesses make up the majority of industrial firms in LDCs’ economies and may be underrepresented in business surveys used for constructing datasets such as the IIP. These firms may, in fact, have been hit hardest by COVID-19-related lockdowns and the drop in supply and demand. UNIDO |(2021)6, for example, finds that the reported loss in profits due to COVID-19 are, on average, more pronounced in LDC firms than in others.7 Furthermore, better prepared firms in more developed countries seem to have weathered the storm by managing their inputs and switching suppliers8, and are currently on the road to recovery. Firms backed by international corporations may have also fared better because they were able to avoid cash flow problems and continued to have easier access to international markets.
LDCs and the rest of the world
How has the COVID-19 pandemic affected industry in LDCs compared to the rest of the world? The figure below shows the short-term and medium-term impact on industrial production in LDCs compared to non-LDCs. It reflects relative changes in the index on industrial production (IIP; on average an equal drop in the IIP is a smaller absolute change for LDCs than for non-LDCs).
The left-hand side shows the change between the 4th quarter 2019 and the 2nd quarter 2020, i.e., during the period immediately before and after the outbreak of the pandemic. On average, LDCs’ industrial production decreased more than that of non-LDCs across all industries. Further analysis on the subsector level (not presented in the graph) reveals some noticeable exceptions. The food industry (low-tech) did not show a short-run decline in LDCs, neither did the pharma industry (high-tech) in non-LDCs.
The right-hand side takes a longer view (from before the outbreak of the pandemic until the second quarter 2021) and shows that industries in LDCs recovered relatively more substantially than non-LDCs. While all manufacturing industries could increase their production in LDCs on average during that period, a number of industries (mostly low-tech) were still decreasing their output in non-LDCs.
Trends in LDC trade
Turning to manufacturing trade in LDCs, calculations based on recent COMTRADE data9 suggest that the pandemic has had a negative effect and that full recovery has not yet been reached. The figure below shows that the monthly trade data of 42 LDCs were already pointing downward in the months preceding the outbreak of the COVID-19 pandemic and have been winding down even further since March 2020. Against the general trend, some manufacturing exports from LDCs increased over the last two years and during the pandemic. For others, the pandemic was the reason for the decrease in exports.
While our data on industrial production in LDCs indicate signs of recovery, this does not appear to be reflected in the trade data of LDCs.One possible explanation of this reduction in trade could be due to the tendency of companies (particularly in higher-income countries) to source supplies from less distant producers (i.e. shortening of supply chains) instead of using LDCs for inputs. In LDCs this might have been partly compensated with local production and consumption. While it may be too early to confirm this trend based on available data, it is worth exploring this angle in future research.
We turn to global value chain (GVC) trade, i.e. trade of goods that are part of a multi-stage production process and that cannot be used as commodities by other companies due to their specific nature.10 Looking at GVC-related import and export data in such a way can serves as an approximation of a country’s backward and forward engagement in GVCs.11
The figure below compares average GVC trade with non-GVC trade in LDCs before and after the outbreak of the pandemic. Looking at the short-term impact (March – April 2020), we find that GVC trade was affected more strongly in relative terms with -43 per cent in GVC imports and -37 per cent in GVC exports compared to the decrease in non-GVC trade, which was larger in absolute terms. Overall, manufacturing trade dropped as already shown in the figure above.
The fact that GVC-related manufacturing imports were hit harder than exports is consistent with China’s influence as a manufacturing hub and import trading partner of LDCs; GVC-related imports in LDCs decreased—among other things—due to disruptions to China’s supply chains at the beginning of the pandemic.
It seems that the pandemic generally led to a drop in demand for manufactured goods which in turn also affected exports of primary materials. Given the importance of commodity exports for LDCs, this seems to have posed a bigger problem for LDCs in the short run. Nevertheless, the low level of exports, especially of GVC-related goods, points to the structural challenges LDCs seem to face in terms of integrating in GVCs.
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).
- UN Committee for Development Policy (2021). Comprehensive Study on the Impact of COVID-19 on the Least Developed Country Category.
- UNCTAD (2021). The Least Developed Countries in the post-COVID world: Learning from 50 years of experience. UNCTAD, Geneva.
- The quarterly Index of Industrial Production (IIP) measures real output change based on observed index numbers of industrial production collected by UNIDO’s Statistics Division from national statistical sources. The Index is set to 100 in 2015 for all countries.
- They are Bangladesh, Burundi, Mozambique, Nepal, Niger, Rwanda, Senegal and the United Republic of Tanzania. UNIDO also provides monthly data which, however, only cover four LDCs. The monthly data indicate that the strongest downturn occurred in April 2020, the month after the outbreak of the pandemic.
- The database covers only six low-income countries. LDCs represent all six low-income as well as two lower middle-income countries.
- UNIDO (2021). Industrial Development Report 2022: The future of industrialization in a post-pandemic world. UNIDO, Vienna.
- The survey sample of 26 countries included seven LDCs (AFG, BGD, LAO, RWA, ZMB, SEN, COD). More information on the survey can be found here.
- McKinsey (2020). Resetting supply chains for the next normal.
- Recent LDC trade data can only be constructed using mirror data as LDCs have not (yet) reported recent monthly data. That is, LDC trade flows are reconstructed using reported trade data from trade partners. The following LDC trade figures are based on reported trade data of 112 countries. As this, by construction, excludes LDC-to-LDC trade, certain types of goods primarily traded among LDCs might have been missed.
- Manufacturing GVC participation is calculated using UN COMTRADE BEC revision 5 and defined as the share of ‘specific’ intermediates and capital goods—that is, goods with specific characteristics that are not traded as commodities—in total manufacturing trade.
- It is an approximation because it measures goods that are most likely produced in a GVC vs. goods that are most likely not produced in a coordinated GVC.