Does disaster risk management matter for industrial policy design?

Manufactured goods are an essential part of any economy, but in times of crisis, the manufacturing sector becomes even more critical to national and global socioeconomic resilience. Industrial goods such as food, medicine and clothing, as well as machinery and engineering services, are crucial to national infrastructure and for tackling emergencies such as pandemics, financial crises, recessions, hazardous climate change and other (internal and external) shocks and events. For example, personal protective equipment (PPE) and medical equipment were essential in responding to the COVID-19 pandemic.

The manufacturing sector also contributes to the recovery and growth of national economies following a disaster. However, the sector itself is also vulnerable to global disasters. Short-term microeconomic effects include the loss of firms’ strategic assets (largely due to the destruction of jobs and of the accumulated experience and knowledge of employees), disruptions of supply chains, difficulties adjusting to new market conditions by otherwise viable firms and missed innovation opportunities and declining productivity. Several studies, based largely on surveys of firms in different countries12, demonstrate the presence of these effects in the case of COVID-19.

While the long-term impacts of COVID-19 on manufacturing are yet to be seen, they certainly reach beyond decreased manufacturing productivity and employment. Strategic changes are to be expected when value chains are restructured to reduce vulnerability, while several countries have sought to enhance sovereign productive capacities in critical sectors.34 

Fostering resilience in the manufacturing sector

The risks the manufacturing sector face can broadly be categorized as supply risks related to an event that causes failures in upstream producers or supply chains; operational risks related to an event that affects the workforce, capital stock, infrastructure or other elements of a firm’s ability to produce goods and provide services; and demand risks related to an event that affects markets or the likelihood of customers placing orders.

While the resilience dimension is a common guiding principle in several policy areas such as emergency management and civil protection, urban planning, infrastructure and defence, this has not been the case so far for industrial policy. Managing these risks calls for a new approach to industrial policy design that explicitly accounts for disaster management and enables firms to turn more frequent and intensifying disasters into a source of increased competitiveness and growth.5 

This approach should build on a framework (such as the Sendai Framework for Disaster Risk Reduction)6 to help policymakers identify sources of risk and strengthen countries’ resilience by fostering (i) prevention, (ii) preparedness, (iii) response and (iv) recovery. The figure below proposes an industrial policy framework that embeds these four components of disaster resilience within policy goals and links them to specific interventions.

Policy goals and sample measures to foster resilience in the manufacturing sector

The COVID-19 pandemic has highlighted many instances of manufacturing resilience, illustrating the substance of this framework. In the prevention realm, for example, Chile designated certain industries as essential, exempting them from any lockdown measures. Nigeria is boosting its preparedness by strengthening strategic stockpiles, especially of reagents used in virus testing. Bangladesh responded to the pandemic by suspending duties and taxes on medical supply imports, including PPE. Finally, the Greening Ethiopian Manufacturing Project received additional funding to help micro- and small manufacturing firms recover by capturing green growth opportunities.

Risks to industry beyond the pandemic

Disaster preparedness will need to consider more than just pandemics. Climate change and other natural disasters are also major–and growing–risk factors. Acute extreme weather events are becoming both more frequent and more disruptive (see figure below), risking the potential loss of years of industrialization efforts. Other climate-related risks, including political instability, food insecurity and mass migration, will likely be manifested over longer timeframes, but are no less concerning.

Leveraging resources to build resilience

The diversity of risks and the complexity of disaster risk management will require the mobilization and channeling of the full range of resources available to firms or countries, and the coordination of multiple actors to anticipate risks and plan responses. Understanding the full range of risks and vulnerabilities across supply chains, particularly those related to critical goods, will need to be supported by data analytics capabilities and insights into industrial and technology trends. These should be complemented by governance structures to leverage domestic research, design, engineering and re-engineering capabilities, and the technical and financial capacity to deliver business advisory services.

For several developing countries, the combined notions of risk and investing in prevention brings to the fore missed opportunities for the development of domestic insurance markets specialized in manufacturing activities. Progress in this direction will require multipronged approaches to improve capacities for modelling and pricing of large-scale disaster risks, developing and implementing standards, and practices to encourage the expansion of insurance protection. Strengthening available fiscal space would also enable governments to better fulfil their role as “insurers of last resort”, supporting risk transfer over time through taxation and borrowing, for example, or by encouraging wider adoption of insurance protection by the private sector.

Finally, the pandemic has considerably challenged global dynamics, making regional connections and collaboration increasingly relevant. There is scope to discuss industrial policy in terms of leading a coordinated response to disasters beyond national borders, including at the regional and global levels. Industrial sector resilience, too, should be fostered through governance structures that leverage contributions from non-governmental and international organizations, as well as a range of local and foreign private sector actors. 

This piece is part of the IAP IDR2022 series, based on UNIDO's flagship Industrial Development Report (IDR) 2022 and its background papers.