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Yirgalem Integrated Agro-Industrial Park in Ethiopia. (Image:UNIDO)  

The effects of COVID-19 on industry in least developed countries

LDCs may have recovered their industrial production but not their trade in manufacturing products.

By Frank Hartwich and Christoph Hammer

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.

Quarterly IIP in selected LDCs

Note: Base year of the index is 2015=100. Index values refer to changes of real industrial output in the country. For example, by 2021, Bangladesh doubled their industrial production since 2015. Does not necessarily mean Bangladesh produces more than the other LDCs shown. 

Source: UNIDO IPP. Start of the pandemic between Q1 and Q2 of 2020. 

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.

Quarterly IIP by income group

Note: Income groups by the World Bank definition. 43 high-income, 31 upper-middle income, 21 lower-middle income and 6 low income countries. Available LDCs are all 6 low-income and 2 lower-middle income countries. Base year of the index is 2015=100. Index values refer to changes of real industrial output in the country group. Does not indicate absolute value of industrial production, 

Source: UNIDO IPP. Start of the pandemic end of Q1 of 2020. 

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.

IIP growth rate across industry technology intensity

Note: The x-axis shows the IIP growth rates in % between the two points in time. The y-axis is grouped by country type and industry-technology levels and the bars represent the average values of these groups.

Source: Authors based on UNIDO IIP.

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.

Monthly manufacturing trade of LDCs during the COVID crisis

Notes: Figure based on mirrored trade data from 112 countries.

Source: UN COMTRADE HS 2012.

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.

GVC-related trade

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.

Manufacturing GVC trade of LDCs

Notes: Manufacturing refers to 10-33 in ISIC rev. 4. Figure based on mirror trade data from 112 countries. GVC trade refers to ‘specific’ intermediate and capital goods according to classification BEC revision 5.

Source: UN COMTRADE BEC rev. 5.

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.

  • Christoph Hammer is Consultant on Industrial Policy Analysis at 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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