Full Report PDF

Industrial Development Report 2018
Demand for Manufacturing: Driving Inclusive

and Sustainable Industrial Development
Industrial Development Report 2018
Demand for Manufacturing: Driving Inclusive

and Sustainable Industrial Development
Copyright © 2017 United Nations Industrial Development Organization
The designations employed and the presentation of material in this publication do not imply the expression of
any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city
or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.
Designations such as “developed,” “industrialized” and “developing” are intended for statistical convenience
and do not necessarily express a judgment about the state reached by a particular country or area in the develop-
ment process.
The mention of firm names or commercial products does not imply endorsement by UNIDO.
Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with
a copy of the publication containing the quotation or reprint.
For reference and citation, please use: United Nations Industrial Development Organization, 2017. Industrial
Development Report 2018. Demand for Manufacturing: Driving Inclusive and Sustainable Industrial
Development. Vienna.
UNIDO ID/448
Sales Number: E.18.II.B.48
ISBN: 978-92-1-106455-1
eISBN: 978-92-1-362857-7
Contents
Page
xiii Foreword
xv Acknowledgements
xvii Technical notes and abbreviations
xix Glossary
1 Overview
Part A Demand for manufacturing: Driving inclusive and sustainable

industrial development
27 Chapter 1 Bringing “affordable variety” to all

27 A new perspective: Demand
28 Has manufacturing become more important or less?
31 The benefits of affordable variety: Increasing consumer welfare, driving income creation and
industrialization, and contributing to sustainable development
42 Notes
45 Chapter 2 The virtuous circle of manufacturing consumption

45 Interactions between consumer demand and industrial development
46 Diversification of demand and the emergence of new industrial sectors
53 Massification of demand and the consolidation of industrial sectors
54 Increasing production efficiency and raising purchasing power
56 Challenges and opportunities from the virtuous cycle
64 Notes
65
Chapter 3 Capturing incomes from domestic demand for
manufacturing
65 Domestic demand, income creation and industrial development
66 The importance of domestic demand
67 Leakages abroad and the foreign content of domestic production
69 The contribution of domestic demand to income creation
79 Domestic prices and purchasing power
84 Policies to foster domestic demand and industrial development
87 Notes
iii
Page
89 Chapter 4 Capturing incomes from global demand for manufacturing

89 Global demand, income creation and industrial development
89 A quick review of the debate on the impact of manufacturing exports and development
92 Increasing the purchasing power of manufacturing exports: Volume, price and variety
Contents
98 Development and impact of manufacturing export prices

105 Impact of global demand characteristics on manufacturing export prices
106 Policies to promote export-driven industrial development
110 Notes
113 Chapter 5 Moving towards sustainable manufacturing consumption

113 Demand for manufacturing goods and the environment
114 A sustainable virtuous circle of manufacturing consumption
115 Impacts on environmental sustainability
122 Using environmental goods on the path to sustainability
129 Policies to minimize barriers and stimulate drivers for sustainable consumption
134 Notes
135
Chapter 6 Demand-driven policies to foster manufacturing
in developing countries: Can they be inclusive and
sustainable?
135 Rationales for demand-driven industrial policy interventions
138 Demand as a framework condition for industrialization
141 Demand for manufactured goods as an actionable variable
150 A long-term perspective on demand-driven industrial policies: The Republic of Korea’s automotive
industry
151 Concluding remarks
154 Notes
Part B Trends in industrial development indicators
157
Chapter 7 Industrial trends: Manufacturing value added,
employment, prices, exports and energy intensity
157 Trends in value added
166 Trends in employment
170 Trends in value added per worker
170 Trends in prices
170 Trends in exports
175 Trends in manufacturing energy intensity
177 Note
iv
Page
179 Chapter 8 The Competitive Industrial Performance index

179 The Competitive Industrial Performance index
179 Definitions of indicators
181 The 2015 CIP rankings
Contents
190 Changes in industrial competitiveness
Annexes
194 A1 Country classification used for the estimation of income elasticities and Engel curves
195 A2 Median income elasticity and tendency of spending satiation across different income and
economy groups
197 A3 Indicators used in the analysis of the purchasing power of manufacturing exports by
economy groups
198 B1 Indicators of manufacturing value added and exports by industrialization level, development
group, region and income
202 B2 Summary of world trade by industrialization level, development group, region and income
205 B3 Indicators of competitive industrial performance by country and economy
210 C1 Country and economy groups
215 C2 Classification of manufacturing sectors in various sources
218 C3 Classification of manufacturing sectors by technology group
220 C4 Classification of manufacturing consumption goods
221 C5 Classification of manufacturing sectors by final use of their products
222 D1 Data guide
229 References
Boxes
28 1.1 What is demand?
34 1.2 Tapping the mass market for film, video recorders and disposable nappies
39 1.3 Enforcing standards in food products
41 1.4 Enforcing quality standards in medicines
50 2.1 Calculating the satiation rate
59 2.2 Technology and changing patterns of demand: Implications of the spread of e-commerce
platforms for developing and emerging countries
75 3.1 Measuring changes in the diversity of consumption patterns
99 4.1 The Republic of Korea’s race to the top: Shifting from quantity to quality, goods and education
104 4.2 Increasing product quality in Colombia’s cosmetic sector
108 4.3 Avoiding premature deindustrialization
116 5.1 UNIDO and the circular economy
121 5.2 Benefits of the circular economy in India
122 5.3 Measurement problems on the impact of environmental goods
v
Page
124 5.4 Organic products as environmental goods: The environmental impact of organic farming
130 5.5 The importance of policies for the domestic market of environmental goods
131 5.6 Incentivizing electric cars in China
132 5.7 The Montreal Protocol: 30 years of influencing consumption and production patterns
Contents
139 6.1 Upgrading the quality of coffee in Rwanda through standards and certification
141 6.2 Anticipating technological changes in manufacturing through technological foresight
142 6.3 Eco-labelling in India
145 6.4 Health policy as a driver of industrial policy in Mexico’s generic drug market
147 6.5 Fostering innovation in China by subsidizing the purchase of new-energy vehicles
148 6.6 Developing the capacities of small and medium-size enterprises to provide information and
communication technology to Sri Lanka’s public sector
149 6.7 Encouraging women-owned enterprises in the Dominican Republic to bid on public tenders
Figures
1 1 A virtuous circle of manufacturing consumption and industrial development
3 2 Manufacturing: A key provider of goods for private household consumption
5 3 The share of household spending on food declines as income rises
6 4 Over the past decades, household consumption of durable manufacturing goods has spread
at an increasing rate around the world
7 5 Relative price of manufacturing in decline compared with the global economy
8 6 The virtuous circle of manufacturing consumption: The global economy
11 7 The virtuous circle of manufacturing consumption: The domestic economy
12 8 Changing trends in the relative importance of domestic demand for final manufactures
13 9 Increasing the purchasing power of exports is associated with higher growth rates in per
capita GDP
15 10 Higher industrial capabilities are needed to benefit from middle class expansion, real wages
gains and diversification of domestic consumption
18 11 Global biocapacity went into the red nearly half a century ago
20 12 A sustainable virtuous circle of manufacturing goods
29 1.1 Declining trend in manufacturing’s nominal share of world GDP
29 1.2 Falling share of manufacturing workers in world employment
29 1.3 Increasing wedge between world real value added per worker in manufacturing and the
total economy
30 1.4 Relative price of manufacturing in decline compared with the global economy
30 1.5 Increasing trend in the real share of manufacturing in world GDP
31 1.6 Manufacturing: A key provider of goods for private household consumption
35 1.7 The virtuous circle of manufacturing consumption: The global economy
36 1.8 The virtuous circle of manufacturing consumption: The domestic economy
46 2.1 The share of household spending on food declines as income rises
47 2.2 Income segments in the Global Consumption Database
47 2.3 Large differences in the distribution of the population across income segments and
development stages
vi
Page
49 2.4 High income households in general spend less on food than other products
50 2.5 Consumer durables and luxury goods have high income elasticities of demand
51 2.6 Lowest income households spend more on household textiles and telephone equipment as
income rises
Contents
52 2.7 Food products satiate but manufacturing products and services do not
52 2.8 Consumption bundles expand as countries develop
54 2.9 Over the past decades, household consumption of durable manufacturing goods has spread
at an increasing rate around the world
55 2.10 The speed and diffusion potential of many durable goods depend on income levels and
product characteristics
56 2.11 Speed of diffusion varies due to country-specific conditions
57 2.12 Demand for necessities gives new impetus to labour-intensive industries in low-income
countries
57 2.13 Manufacturing sector increases labour productivity faster and prices slowly
58 2.14 The higher the labour productivity is, the lower the price increase in the manufacturing sector
58 2.15 Patterns of value added, employment and labour productivity change in electrical and
machinery and food and beverage industries
60 2.16 Diffusion patterns of durable goods vary across countries at different stages of industrialization
61 2.17 Income inequality lowers the diffusion of household durable goods
66 3.1 Changing trends in the relative importance of domestic absorption of manufacturing goods
67 3.2 Decreasing importance of domestic absorption of manufacturing goods as countries get richer
67 3.3 Private household consumption is the most important component of domestic absorption
of manufacturing goods
68 3.4 A widespread increasing share of imports in the domestic absorption of manufacturing goods
69 3.5 Larger foreign value added embodied in domestically produced and absorbed final
manufacturing goods in industrialized economies
70 3.6 A significant share of GDP is generated by the final demand for manufacturing goods,
especially in industrialized and emerging industrial economies
71 3.7 Higher contribution of domestic absorption to the income generated by the final demand
for manufacturing goods in less industrialized economies
71 3.8 Increasing impact of domestic absorption of manufacturing goods on income generation
across all industrialization levels
72 3.9 Trends in European demand for manufacturing goods differing from other geographical
regions: Stable or decreasing contribution of domestic absorption
73 3.10 Increasing gains in real wages go hand in hand with income generated by domestic
absorption of manufacturing goods
74 3.11 As the middle class grows, income generated by the domestic absorption of manufacturing
goods rises
76 3.12 Incomes generated by domestic absorption of manufacturing goods are larger when
consumption becomes more diversified
77 3.13 High industrial capabilities are needed to benefit from middle class expansion, real wages
gains and diversification of domestic consumption
78 3.14 Multiplier effects of private consumption of manufacturing goods across industrialization levels
vii
Page
78 3.15 Higher wage shares in GDP accompanied by bigger multiplier effect of household
manufacturing consumption
80 3.16 Large drops in relative prices of communication and information processing goods across
selected industrialized economies
Contents
81 3.17 Widespread reductions in relative prices across all key manufacturing categories but food
and beverages in selected developing economies
84 3.18 Diversity of manufacturing consumption increases with average incomes across emerging
industrial and developing economies…
85 3.19 …and industrialized economies as well
91 4.1 The Prebisch-Singer hypothesis and the development of terms of trade
93 4.2 An increasing share of emerging industrial economies in global export markets for
manufacturing goods
94 4.3 Richer countries have stronger purchasing power of manufacturing exports
94 4.4 Countries at lower incomes increased their purchasing power of manufacturing exports the most
95 4.5 Increasing the purchasing power of exports is associated with higher growth rates in per
capita GDP
96 4.6 Relationship between GDP per capita and changes in manufacturing barter terms of trade
and manufacturing export volumes
97 4.7 Manufacturing export volume and changes in the extensive and intensive margins in
manufacturing exports
98 4.8 Technological upgrading offsets decreasing manufacturing terms of trade over time
99 4.9 Growth in manufacturing export unit values
100 4.10 Growth in unit values of exports by ISIC two-digit sector relative to all manufactured goods
101 4.11 Country groups show wide differences in the drivers of manufacturing export price changes
102 4.12 The drivers of manufacturing export price changes differ by industry
103 4.13 Higher prices of manufacturing exports accelerate economic growth, mainly in the long run
107 4.14 Where you export to matters: Impact of market size and income level of trading partners on
unit value ratios
108 4.15 Unit value ratios improve with higher global demand for domestic products
115 5.1 A sustainable virtuous circle of manufacturing consumption
117 5.2 Lowest saving rates at each end of the income curve
118 5.3 Global biocapacity went into the red nearly half a century ago
118 5.4 Higher emission pathways tied to delays in tackling climate change
118 5.5 Global peak waste expected in next century
119 5.6 Consumption-based estimates of global carbon emissions higher than production‑based
estimates
119 5.7 Global use of materials, 1995–2013
120 5.8 Decomposition of CO2 emissions per capita growth and materials consumption per capita
growth in the manufacturing sector points to scale effects in especially emerging economies
121 5.9 Elasticity of the environmental pressure intensity to GDP per capita in the manufacturing
sector
121 5.10 The economy becomes more circular as GDP per capita increases
122 5.11 Export share of intermediate environmental goods on the rise
viii
Page
123 5.12 Consumer attitude: How guilty do you feel about your impact on the environment and do
you try to reduce it?
125 5.13 Organic consumption still a market segment in developed nations
125 5.14 Rising demand for electrical cars still to be manifested in market share
Contents
126 5.15 Increasing penetration rate of high-efficiency refrigerators
127 5.16 Projections of electric vehicles and cost of lithium-ion battery packs
127 5.17 Average prices of refrigerators sold in the European Union, 2004–2014
128 5.18 Widening environmental footprint from consumption as wealth rises
129 5.19 Consumer attitude: There is very little individuals can do to reverse the impact of society on
the environment
130 5.20 Higher growth in companies adopting pro-environmental campaigns
150 6.1 Development of the Republic of Korea’s automotive industry: From imitation to innovation
157 7.1 An increasing trend in global manufacturing value added
158 7.2 The 15 largest manufacturing producers in the world
159 7.3 Annual growth of manufacturing value added reflects a recovery of manufacturing after the
global financial crisis
160 7.4 China is the largest manufacturing producer in developing and emerging industrial
economies (percent of country group’s manufacturing value added)
161 7.5 A shift of manufacturing production from industrialized economies to developing and
emerging industrial economies
161 7.6 The importance of manufacturing industries is increasing in developing and emerging
industrial economies compared with a declining trend in industrialized economies
162 7.7 The Asia and Pacific region covered almost half of global manufacturing production in
2016 (percent of global manufacturing value added)
163 7.8 The Asia and Pacific region has dominated global manufacturing production since 2002
163 7.9 Manufacturing value added per capita in industrialized economies is multi-fold higher than
in developing and emerging economies
167 7.10 Industrialized economies continue to dominate global medium-high and high-tech
manufacturing production
167 7.11 A slightly increasing trend in world manufacturing employment
168 7.12 The total number of jobs in manufacturing is decreasing in industrialized economies
169 7.13 The major industrialized economies have seen manufacturing employment shrink
169 7.14 The share of manufacturing employment in total employment diminished in developing
and emerging industrial economies against an increasing number of jobs
170 7.15 Manufacturing employment in developing and emerging industrial economies is highly
dominated by China
171 7.16 Labour productivity in manufacturing is higher in industrialized economies than in
developing and emerging economies
172 7.17 Manufacturing industries tend to show a more persistent decline in relative prices than the
overall economy
173 7.18 The structure of global manufacturing exports dominated by industrialized economies
174 7.19 Medium-high and high-tech products continue to dominate global manufactured exports
174 7.20 Growth trends in manufactured exports per capita
ix
Page
175 7.21 Medium-high and high-tech products accounting for more than half of manufactured
exports in developing and emerging industrial economies in 2015 (percent of country
group’s manufactured exports)
175 7.22 World final energy consumption, by sector
Contents
176 7.23 A declining trend in world manufacturing energy intensity

176 7.24 Global diverging trends in manufacturing value added, manufacturing energy consumption
and manufacturing energy intensity
177 7.25 The majority of economies tend to decrease manufacturing energy intensity
180 8.1 Composition of the Competitive Industrial Performance index
189 8.2 Changes in Competitive Industrial Performance index among economies in the top quintile
195 A2.1 Differences in median income elasticities of selected manufacturing goods across economy
groups
196 A2.2 Tendency of spending satiation across different income and economic groups
Tables
22 1 Government roles and industrial policy interventions for demand as a framework condition
or an actionable variable
82 3.1 Import penetration ratios for various final household consumption categories in selected
industrialized economies, 2000 and 2011, and the change in this period
83 3.2 Import penetration ratios for various final household consumption categories in selected
developing countries, 2000 and 2011, and the change in this period
133 5.1 Diffusion of the EU Ecolabel in EU countries
137 6.1 Government roles and industrial policy interventions for demand as a framework condition
or an actionable variable
143 6.2 Features and benefits of national brand campaigns to foster local content and consumption
of domestic manufacturing products
152 6.3 Policy instruments the Republic of Korea used to develop its automobile industry
158 7.1 Manufacturing value added in developing and emerging industrial economies by
industrialization level, development group, region and income, 1990, 2000 and 2016
159 7.2 Average annual growth rate of manufacturing value added by industrialization level,
development group, region and income, 1990–2016 (percent)
159 7.3 Average annual growth rate of manufacturing value added in selected countries, 1990–2016
164 7.4 Share of manufacturing value added by industry group, industrialization level and worldwide,
2000, 2005 and 2015 (percent)
165 7.5 Share of manufacturing value added by industry group and industrialization level, 2005,
2010 and 2015 (percent)
166 7.6 Technology intensity composition of manufacturing value added by industrialization level,
development group, region and income, 2005, 2010 and 2015 (percent)
171 7.7 World manufacturing exports by industrialization level, development group, region and
income, selected years, 1996–2015 (current $, billions)
173 7.8 Average annual growth rate of manufactured exports by industrialization level, development
group, region and income, 2000–2015 (percent)
x
Page
181 8.1 Definition of indicators

182 8.2 Competitive Industrial Performance index, 2015
184 8.3 Industrial competitiveness ranking and selected indicators for industrialized economies and
world ranking comparison, 2010 and 2015
Contents
185 8.4 Industrial competitiveness ranking and selected indicators for emerging industrial
economies and world ranking comparison, 2010 and 2015
187 8.5 Industrial competitiveness ranking and selected indicators for other developing economies
and world ranking comparison, 2010 and 2015
188 8.6 Industrial competitiveness ranking and selected indicators for least developed countries and
194 A1.1 Countries classified into global income groups
197 A3.1 Indicators used in volume, price and variety analysis
198 B1.1 Manufacturing value added per capita, 2010–2015 (constant 2010 $)
199 B1.2 Manufactured exports per capita, 2010–2015 (current $)
199 B1.3 Impact of countries on world manufactures trade, 2010–2015 (percent)
200 B1.4 Impact of countries on world manufacturing value added, 2010–2015 (percent)
200 B1.5 Medium-high and high-tech manufacturing value added share in total manufacturing,
2010–2015 (percent)
201 B1.6 Share of manufacturing value added in GDP, 2010–2015 (percent)
201 B1.7 Share of manufactured exports in total exports, 2010–2015 (percent)
202 B2.1 Total exports, 2010–2015 (current $, billions)
203 B2.2 Low-tech manufactured exports, 2010–2015 (current $, billions)
203 B2.3 Medium-low tech manufactured exports, 2010–2015 (current $, billions)
204 B2.4 Medium-high and high-tech manufactured exports share in total manufactured exports,
2010–2015 (percent)
205 B3.1 Competitive industrial performance, 2010 and 2015
210 C1.1 Countries and economies by region
212 C1.2 Countries and economies by industrialization level
213 C1.3 Countries and economies by income level
215 C2.1 Classification of manufacturing sectors, ISIC Rev.3
216 C2.2 Classification of manufacturing sectors, Eora Multi-Regional Input-Output Database
217 C2.3 Classification of manufacturing sectors, OECD Inter-Country Input-Output Database,
2016 edition
218 C3.1 Technology classification of medium- and high-tech manufacturing exports
219 C3.2 Technology classification of manufacturing sectors
220 C4.1 Classification of individual consumption of manufacturing goods
221 C5.1 Sectors producing consumer, intermediate, other investment and high-tech products
222 D1.1 Figures, tables and datasets based on background papers prepared for Industrial Development
Report (IDR) 2018
223 D1.2 Classifications used for producing Industrial Development Report (IDR) 2018 figures and
tables and their datasets
224 D1.3 List of datasets used for production Industrial Development Report (IDR) 2018 figures and
tables
xi
Foreword
Inclusive and sustainable under the right conditions, the consumption of new
industrialization is essen- products can set in motion a virtuous circle of indus-
tial to achieve sustainable trial development, demand diversification and income
development. It unleashes creation.
dynamic and competi- By placing demand at the centre of attention, this
tive economic forces that year’s IDR acknowledges the role of manufacturing
generate employment and industries as major providers of new and improved
income, facilitate inter- goods. Since the first industrial revolution, manufac-
national trade and enable turing has changed our lives in a radical way. Many
efficient use of resources. activities of our daily lives would have been impossible
As such, it is a major driver of poverty alleviation and to imagine without the technological breakthroughs
shared prosperity. in manufacturing—from the introduction of cars and
The Industrial Development Report (IDR) series washing machines to the distribution of computers
is an established source of reference on industrial and, more recently, smartphones and 3D printers. In
development. Previous editions have been examining all these cases, new products were first introduced to
the driving forces of industrialization and the posi- the market at high prices, affordable only for a few.
tive factors that can lead to social inclusiveness and But the continuous process of innovation and compe-
environmental sustainability. They have examined tition has been making them affordable for more and
crucial components of the production side of industri- more households around the world.
alization, such as capacity building, energy efficiency, UNIDO’s vision is that no one should be left
employment creation and technological change, to behind in benefiting from industrial development and
mention just a few. that the prosperity it creates should be shared among
This 2018 edition of the IDR complements previ- all people in all countries. As the report highlights, for
ous reports by shedding light on a dimension of indus- this to happen, countries need to be involved in the
trial development that has still been unexplored: the process of industrialization. This requires building
consumption of manufactured goods. Understanding industrial capabilities to serve new and more sophis-
the consumption side is essential to fully grasp the ticated demands from consumers. Moreover, the
drivers and impact of industrialization. On the one incomes generated in the virtuous circle of consump-
hand, industrialization cannot take place unless there tion need to be distributed evenly across households
is sufficient demand for new products. We thus need in individual countries. An important finding of the
to understand the determinants of manufacturing report is that the expansion and strengthening of mid-
consumption. On the other hand, industrial develop- dle classes is a powerful driver of domestic demand for
ment can bring important benefits to consumers, and new products and industrial development.
can thereby significantly improve their living stand- In addition, industrial development needs to take
ards and well-being. We need to better comprehend place in an environmentally sustainable manner.
how to improve the positive impact on consumers. Increased consumption of new products can add pres-
This IDR, for the first time, provides a framework sures on the environment. These pressures can be miti-
that captures the interactive nature of manufactur- gated through environmental interventions in manu-
ing consumption and industrial development, sup- facturing industries that lead to the production of
ported by empirical evidence. The report shows that, environmental goods: that is, goods that minimize the
xiii
use of natural resources and toxic materials, as well as roles and actively engage with the private sector and
the emissions of waste and pollutants. The technology other stakeholders, thereby acknowledging the role of
for cleaner industrial production already exists, and the private sector as a driver of industrialization.
“green industries” can be promoted to deliver environ- It is a great pleasure for me to present this report.
Foreword
mental goods and services. A key message of the report I am delighted that Industrial Development Report
is that the development of these industries requires 2018 adds a consumption dimension to the analysis
major shifts in the consumption patterns towards the of industrial development. This report reaffirms the
purchase of environmental goods. Important barriers commitment of UNIDO in supporting the achieve-
need to be removed to allow widespread consumption, ment of inclusive and sustainable industrial develop-
including too high prices, gaps in consumer awareness ment. I am grateful to the UNIDO team and our
of environmental concerns and biases in purchasing international experts for producing this timely report,
behaviour. which displays our added value towards sustainable
Several policy tools that focus specifically on the development.
demand for manufactures can support an inclusive
and sustainable industrialization process. Demand
can be considered as a framework condition, partially
or completely outside the control of policy-makers, or
as an actionable variable in industrial policy interven- LI Yong
tions. In either case, governments can assume distinct Director General, UNIDO
xiv
Acknowledgements
Industrial Development Report 2018 has been prepared were submitted by the following experts: Irene
by a team of researchers under the overall guidance Bruschi and Federico Pontoni, Bocconi University;
of Li Yong, Director-General of the United Nations Alexandra Bykova, Mahdi Ghodsi and Robert
Industrial Development Organization (UNIDO). Stehrer, The Vienna Institute for International
The in-house team, led by Shyam Upadhyaya, Officer- Economic Studies; Andreas Chai, Griffith Business
in-charge for the Department of Policy, Research and School; Margarida Duarte, University of Toronto;
Statistics, comprised Adot Killmeyer-Oleche, Nobuya Neil Foster-McGregor, Danilo Sartorello Spinola
Haraguchi, Nicola Cantore, Petra Kynclova and and Bart Verspagen, United Nations University–
Fernando Santiago Rodríguez. The work of the team Maastricht Economic and Social Research Institute
was coordinated by Alejandro Lavopa, who played an on Innovation and Technology (UNU-MERIT);
instrumental role in the drafting, reviewing and suc- Marianna Gilli and Massimiliano Mazzanti,
cessful completion of the report. A substantial con- University of Ferrara; Alexander Haider, The New
tribution was also made by Andreas Reinstaller, from School for Social Research, New York; Hossein
the Austrian Institute of Economic Research, who Jalilian, University of Bradford; Paul Lewis,
drafted a chapter of the report and provided signifi- University of Birmingham; Giovanni Marin,
cant insights on the overall storyline. University of Urbino “Carlo Bo”; Alessio Moneta
The team recognizes the valuable inputs from and Elena Stepanova, Sant’Anna School of Advanced
Manuel Albaladejo, Bernardo Calzadilla Sarmiento, Studies; Francesco Nicolli, National Research
Michele Clara, Giuseppe De Simone, Johannes Council of Italy; Emilio Padilla, Universidad
Dobinger, Smeeta Fokeer, Dong Guo, Jaime Moll De Autònoma de Barcelona; Fei Peng, Shanghai Lixin
Alba, Iñaki Rodriguez Lazaro, Riccardo Savigliano, University of Commerce; and finally, Dániel Vértesy,
Adnan Seric, Stephan Sicars, Nilguen Tas, Valentin European Commission, Joint Research Center.
Todorov, Rene Van Berkel and Alastair West. The Many of the concepts introduced and elaborated
team also appreciates the contribution of Ludovico in the report were developed during IDR core team
Alcorta, who identified the theme and provided the meetings and at workshops at UNIDO headquar-
basis for developing the report until his retirement ters in Vienna in November 2016 and April 2017,
from UNIDO in April 2017. when many of the background papers were presented.
The team expresses sincere appreciation for valu- During these meetings insightful comments were pro-
able comments and support from the members of vided by Michael Landesmann, The Vienna Institute
UNIDO’s Executive Board, namely Fatou Haidara, for International Economic Studies, and Jennifer
Hiroshi Kuniyoshi and Philippe Scholtes. The report Taborda Martinez, UNU-MERIT.
further benefited from constructive comments by The authors of the report were backed by a talented
members of the UNIDO Publications Committee. team of research assistants and interns at UNIDO
Our special thanks go to Ha-Joon Chang from the including Charles Fang Chin Cheng, Alessandra
University of Cambridge, and John Weiss, Emeritus de Macedo, Michele Delera, Arianna Garofalo,
Professor at the University of Bradford, for thor- Erminia Iodice, Ascha Lychett Pedersen, Dea Tusha
oughly reviewing numerous drafts of the report and and Miriam Weiss, as well as Florian Kaulich, from
significantly improving several of its sections. the Vienna University of Economics and Business.
A string of commissioned background papers UNIDO staff members Debby Lee, Fernando
greatly benefited the drafting of the report, and Russo and Iguaraya Saavedra provided extensive
xv
administrative support, and Niki Rodousakis pro- report. Joe Caponio, Mike Crumplar, Barbara Karni
vided copy-editing assistance. and Christopher Trott, also with Communications
The editors, Bruce Ross-Larson and Jonathan Development Incorporated, copy edited and proofread
Aspin at Communications Development Incorporated, the report, and Debra Naylor and Elaine Wilson were
Acknowledgements
improved the language, style and structure of the in charge of design and layout.
xvi
Technical notes and abbreviations
References to dollars ($) are to United States dollars, unless otherwise indicated.
This report classifies countries according to four primary groupings: industrialized economies, emerging indus-
trial economies, other developing economies and least developed countries. The three latter groupings are together
referred to as developing and emerging industrial economies. See Annex C1 for a complete list of countries and
economies by region, industrialization level and income level.
The remaining annexes contain more detailed information about methodology and classifications. Annexes A
and B provide further tables and indicators complementary to those in the text of Parts A and B of the report.
Annex C contains detailed information on the classifications of economies and sectors used throughout the
report. Annex D provides a guide to the origins of the data used for the figures and tables included in this report
and in the series of background papers prepared for it.
In-text values in non-$ currencies are generally followed by a $-approximation, which in all cases is based on the
average exchange rate for the relevant year.
Components in tables may not sum precisely to totals shown because of rounding.
CIP Competitive industrial performance ImWMVA Share of world manufacturing value

COICOP Classification of Individual added
Consumption According to Purpose INDint Industrialization intensity
DVA MADA Domestic value added generated by the ISIC International standard industrial
domestic absorption of manufacturing classification
goods ISO International Organization for
DVA MAFA Domestic value added generated by the Standardization
foreign absorption of manufacturing LDC Least developed countries
goods MBTT Manufacturing barter terms of trade
DVA MAFID Domestic value added generated by the MHVAsh Share of medium-high and high-tech
final demand for manufacturing goods manufacturing value added in total
FAO Food and Agriculture Organization manufacturing value added
FDI Foreign direct investment MHXsh Share of medium- and high-tech
GDP Gross domestic product manufactured exports in total
GMP Good manufacturing practise manufactured exports
HS Harmonized system MITT Manufacturing income terms of trade
ICT Information and communications MSME Micro, small and medium enterprises
technology MTOE Millions of tonnes of oil equivalent
IDR Industrial Development Report MVA Manufacturing value added
ILO International Labour Organization MVApc Manufacturing value added per capita
ImWMT Share of world manufacturing trade MVAsh Share of manufacturing value added in
total GDP
xvii
MXpc Manufactured exports per capita SDG Sustainable development goal
MXsh Share of manufactured export in total SME Small and medium-size enterprise
exports UN United Nations
NGO Non-governmental organization UNIDO United Nations Industrial Development
Technical notes and abbreviations
OECD Organisation for Economic Organization

Co-operation and Development WHO World Health Organization
PPP Purchasing power parity WTO World Trade Organization
R&D Research and development
xviii
Glossary
Affordable variety. Number of distinguishable man- Domestic absorption. Final demand originating in
ufactured goods available to consumers at prices the domestic economy, including private house-
that tend to decline relative to other sectors of the hold consumption, gross capital formation and
economy. Increased variety is characterized along final consumption by governments and non-profit
two broad dimensions: unrelated and related. institutions.
“Unrelated” refers to goods of an intrinsically dif- Ecological footprint. The amount of biologically pro-
ferent nature. “Related” refers to versions of the ductive land and water needed by an entity—an
same product that are differentiated by quality, individual, population or activity—to facilitate the
design or other product characteristics. production of all consumed resources and to absorb
Biocapacity. Represents the ecosystems’ capacity— the waste generated in this process, while adopt-
using prevailing management schemes and extrac- ing current practices for technology and resource
tion technologies—to regenerate the biologically management. An entity’s footprint is measured
productive surfaces on Earth (that is, land and in global hectares. And given the global nature of
water) used by people and to absorb the waste trade, the footprint takes into account land and sea
material they generate. In the National Footprint from all over the world (Global Footprint Network
Accounts of the Global Footprint Network, “the 2017b).
biocapacity of an area [expressed in global hectares] Elasticity. Percentage change in one variable due to one
is calculated by multiplying the actual physical area percent change in another. For example, the growth
by the yield factor and the appropriate equivalence of value added, employment and labour produc-
factor.” (Global Footprint Network 2017b). tivity can be measured as a percentage change in
Bottom of the pyramid. The “bottom of the pyra- these variables due to a one percent increase in gross
mid” is constituted by all consumers who live on domestic product (GDP) per capita.
less than $2 a day (Prahalad 2006). Energy. The ability to do work. In industry it com-
Capital goods. Goods used in the production of other monly refers to the energy used to power manu-
goods and services that are not completely con- facturing processes. This report measures energy
sumed in one use. in tonnes of oil equivalent to allow compari-
Commodification. Persistent decline in export sons of energy from various sources. Primary
prices of a certain good due to standardization energy sources include biomass-based fuels (trees,
and increased competition in global markets. The branches, crop residues), fossil fuels (coal, oil, natu-
commodification of exports is the cumulative rela- ral gas) and renewable sources (sun, wind, water).
tive price decline that a country’s exporting sector Secondary energy sources are derived from other
faces in a specific export destination (Ghodsi and (usually primary) energy sources and have zero pol-
Stehrer 2017). lution at the point of use (electricity, for example).
Commodity trap. Persistent decline in a country’s Energy efficiency. The ratio of a system’s energy inputs
barter terms of trade due to export specializa- to its outputs. In economics, energy efficiency is the
tion in goods that are going through a process of ratio of the value of output to the quantity or cost
commodification. of energy inputs—the amount of economic activity
Discretionary income. Portion of household income produced from one unit of energy.
that can be allocated to other types of expenditure Energy intensity. The amount of energy used to pro-
(other goods) once necessities are fully satisfied. duce one unit of economic output. It is the inverse
xix
of energy efficiency: less energy intensity means and waste management, as well as health and edu-
more energy efficiency. Energy intensity is meas- cation (European Commission 2017a), is referred
ured by dividing the amount of energy used (in to as public procurement (European Commission
physical terms, millions of tonnes of oil equivalent, 2017b). By choosing environmentally friendly
Glossary
or mtoe) by the manufacturing value added (MVA) works, goods and services, also known as green
in monetary terms (in constant 2010 $). The energy purchasing or green public procurement, govern-
intensity of manufacturing is the amount of energy ments contribute to sustainable consumption and
used to produce one unit of value added. production.
Engel curve. Graphical representation of the relation- Inclusive and sustainable industrial development.
ship between household income and the share of Inclusive and sustainable industrial development
expenditures allocated to one specific consump- highlights the role of long-term (or sustained)
tion item. industrialization as a driver for development and
Engel’s law. Economic regularity stating that the includes three different aspects: creating shared
budget share dedicated to food declines as house- prosperity (offering equal opportunities and an
hold income increases (Engel 1895, Houthakker equitable distribution of benefits to all), advanc-
1957). ing economic competitiveness and safeguarding
Environmental goods. Goods that meet basic needs the environment (addressing the need to decouple
or improve the quality of life while minimizing the generated prosperity of industrial activities from
use of natural resources (including toxic materials) excessive natural use and negative environmen-
and the emissions of waste and pollutants over the tal impacts). The Lima Declaration, adopted by
product’s life cycle, in order to avoid jeopardizing UNIDO’s Member States on 2 December 2013,
the quality of life of future generations. set the foundation for this vision (UNIDO 2015e).
Externalities. Costs or benefits that accrue to unre- Income elasticity of demand. Reflects the percentage
lated third parties. When it is a benefit reaped by increase in the consumption of a product due to a
third parties, it is called a “positive” externality. one percent increase in income. Inferior goods have
When it is a cost imposed on third parties, it is a negative elasticity (demand decreases with rising
called a “negative” externality. An externality is a income), necessities have an elasticity between 0
market failure that provides a rationale for indus- and 1 and superior goods have an elasticity higher
trial policy (UNIDO 2011a). than 1 (demand increases with rising income).
Global value chain. The value chain describes the Incremental innovation. Significant enhancement
full range of activities that firms and workers do to or improvement in the performance of an existing
bring a product from its conception to its end use product, service, process, organization or method
and beyond. This includes activities such as design, (OECD and World Bank n.d.).
production, marketing, distribution and support Industrial policy. Any type of intervention or govern-
to the final consumer. The activities that comprise ment policy that attempts to improve the business
a value chain can be contained within a single environment or to alter the structure of economic
firm or divided among different firms (Gereffi and activity towards sectors, technologies or tasks that
Fernandez-Stark 2011). When firms are located in are expected to offer better prospects for economic
different economies, the value chain is considered growth or societal welfare than would occur in the
“global.” absence of such intervention—that is, in a market
Green public procurement. The purchase of works, equilibrium (Warwick 2013).
goods and services by public authorities from com- Informal economy. Portion of the economy that is
panies within sectors such as energy, transport, operated outside the purview of government and
xx
thus is not taxed or included in statistics (UNIDO the decline in the relative prices of manufacturing
2013). goods.
Innovation. Implementation of a new or significantly Process innovation. Implementation of new or signif-
improved product (good or service), or process, a icantly improved production or delivery methods,
Glossary
new marketing method, or a new organizational including significant changes in techniques, equip-
method in business practices, workplace organi- ment or software (OECD and Eurostat 2005).
zation or external relations (OECD and Eurostat Product differentiation. Vertical differentiation
2005). refers to product characteristics that all consumers
Intensive and extensive margins. Export expansion, would agree are valuable and thus constitute qual-
in terms of either products or destinations, can be ity attributes. Horizontal differentiation refers to
at the intensive or extensive margins. Intensive product characteristics considered desirable only
margins refer to growth in the value of existing by some but not all consumers (OECD 2013).
exports to the same destination(s). Extensive mar- Product innovation. The introduction of goods or
gins refer to new export items or new destinations services that are new or significantly improved in
(UN and WTO 2012). their characteristics or intended uses (OECD and
Intermediate goods. Goods used as inputs in the Eurostat 2005).
production of other goods and services which are Public–private partnership. While a universally
completely consumed in one use (UNIDO 2013). accepted definition does not exist, a public–private
Leakages. Fraction of a change in national income partnership is often understood as a long-term
that is not spent on current domestic produc- contractual partnership between a government
tion but is instead saved, paid in taxes or spent on agency (federal, state or local) and a private sector
imports (Mayer 2016). company. The partnership is often used to fund
Manufacturing barter terms of trade (MBTT). public services and infrastructure projects—such
Ratio of a country’s exports price to its imports as telecommunication systems, public transporta-
price of manufacturing goods. tion networks, parks, airports and power plants—
Manufacturing export unit value. Ratio of the that otherwise would have been delivered through
export value of a product to its weight. Commonly traditional public sector procurement. See green
used as a proxy for export prices. public procurement.
Manufacturing income terms of trade (MITT). Purchasing power parity (PPP). A concept that
Ratio of a country’s exports value to its imports price determines the relative values of two currencies’
of manufacturing goods. Indicates the purchasing purchasing power. PPP-based GDP shows what
power of manufacturing exports (in terms of how goods and services produced in one country would
much a country can import per unit of its exports). cost if they were sold in the United States. Since
Manufacturing value added (MVA). See value added. non-tradable services of similar quality are priced
Massification (of manufacturing consumer goods). lower in low-income countries than they are in
Process by which the consumption of a good is the United States, their PPP-based GDPs usually
broadly diffused across households. Mass con- become higher than their GDPs based on market
sumption implies that the majority of families can exchange rates.
enjoy the benefits of increased productivity and Radical innovation. Innovation that has a significant
constantly expand their range of consumer goods impact on a market and on the economic activity of
(Matsuyama 2002). firms in that market (OECD and World Bank n.d.).
Price effect. The income gains stemming from Research and experimental development (R&D).
improved purchasing power of consumers due to R&D comprise creative work undertaken on a
xxi
systematic basis in order to increase the stock of electricity consumed, the cost of industrial services
knowledge, including knowledge of man, culture such as payments for contract and commission
and society, and the use of this stock of knowledge work and repair and maintenance, compensation
to devise new applications. The term R&D covers of employees, operating surplus and consumption
Glossary
three activities: basic research, applied research and of fixed capital. Manufacturing valued added is the
experimental development (OECD 2002). contribution of the entire manufacturing sector to
Resource efficiency. Use of the Earth’s limited GDP (manufacturing net output) (UNIDO 2013).
resources in a sustainable manner while mini- Variety effect. The income gains stemming from the
mizing impacts on the environment (European emergence of new industrial sectors due to the
Commission 2017d). diversification of demand. When demand diver-
Satiation. The satiation level describes the upper limit sifies away from necessities into other “superior”
of household expenditure on any particular good. goods, it creates new opportunities for the emer-
Once the limit is reached, household expenditure gence of new industries, which generates new
will cease to rise in response to increasing income income for workers and entrepreneurs directly and
(Pasinetti 1981). indirectly involved in their production.
Structural change. Change in the long-term compo- Virtuous circle of manufacturing consumption. In
sition and distribution of economic activities. A this report, the virtuous circle of manufacturing
normative perspective of structural change often consumption describes how an increase in discre-
emphasizes desirability in the direction of change. tionary incomes sets in motion a series of interre-
For example, Ocampo (2005), Ocampo and Vos lated effects that foster income gains and welfare
(2008) and UNDESA (2006) define structural through the consumption and production of man-
change as the ability of an economy to continually ufacturing goods. First, demand diversifies from
generate new dynamic activities characterized by necessities into other “superior” goods, creating
higher productivity and increasing returns to scale. new opportunities for the emergence of new indus-
Technological change. Improvements in technology. tries (“variety effect”). Second, the new industries
Technological change involves a series of stages consolidate, improve production efficiency and
with multiple actors, relationships and feedback reduce prices, enabling the mass consumption of
loops—from invention, as a new technology is cre- their products. This creates new opportunities for
ated and prototyped, to innovation, as it becomes income creation as the size of production expands
commercially viable (UNIDO 2011a). (“volume effect”). Third, interfirm competition
Total factor productivity. The amount of output not and innovations lead to further reduction in prices
accounted for by the amount of factor inputs, such in the mass consumption products, augmenting
as labour and capital (UNIDO 2013). the purchasing power of all consumers (“price
Unit labour costs. Cost of labour per unit of output. effect”) and keeping the circle turning.
It is calculated as the ratio of labour costs to real Volume effect. The income gains stemming from the
output (UNIDO 2013). consolidation of industrial sectors due to the mas-
Value added. A measure of output net of intermedi- sification of consumption. Mass consumption gen-
ate consumption, which includes the value of mate- erates new opportunities for income creation as the
rials and supplies used in production, fuels and size of production expands.
xxii
Overview
Demand for manufacturing:
Driving inclusive and sustainable
industrial development
Key messages consolidation of manufacturing industries, in turn, lead
to increases in production efficiency and reduction in
Spinning the “virtuous circle” prices, which enable a broad-based diffusion of manu-
Industrial development has typically been studied factures through mass markets. Further increases in pro-
from a supply-side perspective, ignoring the impor- duction efficiency improve the purchasing power of all
tance of demand. The initiation of industrial devel- consumers, which create new disposable incomes—and
opment, however, requires a critical mass of demand keep the circle turning. Around this circle, industries
for manufactures. With the right set of conditions, emerge and disappear, and new sources of income are
the consumption of manufactures can set in motion created for consumers, workers and entrepreneurs.
a virtuous circle of industrial development comprising
income creation, demand diversification and massifi- Capturing income from domestic and foreign
cation of consumption (Figure 1). demand
Initially, as income grows, demand shifts from neces- For the virtuous circle to work, a critical mass of
sities to more sophisticated goods. If enough industrial income needs to be generated within individual
capabilities are in place, this diversification can be a economies—and this income should be well distrib-
powerful driver of industrial development through uted. Gains going to the top 1 percent will not keep
the emergence of new industries. The expansion and the circle virtuous.
Figure 1
A virtuous circle of manufacturing consumption and industrial development
Increase in
discretionary income
Price
effect
Variety
effect
Decline in prices of Global wages Diversification of
massified goods and profits manufacturing demand
Volume
effect
Massification of
manufacturing demand
Source: UNIDO elaboration.
1
“ Studying manufacturing from
the perspective of demand offers
a more empirically grounded
understanding of the sector’s
evolution and current state
In a globalized economy the income generated What governments can do

depends on who serves the final demand for manu- Governments can encounter demand as a “framework
factures and how. To benefit from the circle, countries condition” (about which they can do little) or as a
need to capture income from both domestic and for- “policy-actionable variable” through which they can
Overview
eign demand. help exploit the opportunities created by manufactur-

Another critical mass—of industrial capabilities ing demand to drive industrial development, mak-
—needs to be reached so that domestic producers can ing this process socially inclusive by shifting incomes
serve increasingly sophisticated demand from con- towards the poorer segments of society and environ-
sumers, nationally and globally. The upshot? Prices for mentally sustainable by encouraging massification in
new varieties of manufactures decline as production the consumption of environmental goods.
efficiency increases.
A new perspective: Demand
Distributing the gains inclusively and
pro-environmentally The traditional approach to studying industrial
The circle of consumption does not guarantee socially development has ignored demand
inclusive and sustainable outcomes. Such inclusiveness Industrial development has been studied largely from
—equal opportunities to contribute and benefit from the production side, with little focus on demand vari-
industrialization—requires that income flow to the ables or their interaction with supply. If they are to
poorest in society, increasing welfare at the “bottom diffuse successfully, new or better products must meet
of the pyramid.” consumer demand.
Increased consumption also intensifies environ- Policies and the academic literature emphasize the
mental impacts, through higher pollution, overuse of productive assets needed for industrial development—
natural resources and creation of waste. Technological including entrepreneurial and technological capabilities,
innovations and “massified” environmental goods are labour skills, quality of resources and good infrastructure
key to addressing this challenge and rendering the vir- —neglecting demand-side variables and policy tools.
tuous circle environmentally sustainable. This report seeks to plug this gap. How does industrial
development improve living standards (Chapter 1)?
Meeting the Sustainable Development Goals How does demand drive industrialization, nationally
The emergence and diversification of mass markets for and globally (Chapters 2–4)? How can consumption be
manufactured products incentivize a process of con- made sustainable (Chapter 5)? What can governments
tinuous innovation. They also call forth the provision do to harness shifts in demand patterns (Chapter 6)?
of infrastructure, from improved transport links to How are these trends reflected in production patterns
optical fibres, to better serve these mass markets. New and competitive performance across regions of the world
industrial sectors emerge and expand, generating new (Chapters 7–8)? Studying manufacturing from the per-
jobs and profit opportunities. If it is made inclusive spective of demand offers a more empirically grounded
and sustainable, the circle is an important catalyst for understanding of the sector’s evolution and current state.
achieving Sustainable Development Goal (SDG) 9
(“Build resilient infrastructure, promote inclusive and Bringing affordable variety for all
sustainable industrialization and foster innovation”).
At the same time, industrial development improves Manufacturing is not losing its significance
the welfare of consumers by providing new varieties Recent global trends have led some observers to (erro-
and qualities of goods that become affordable to eve- neously) conclude that manufacturing is no longer a
ryone, potentially helping achieve other SDGs. key sector of the economy. A popularly held view is
2
“ What matters for consumers
is the creation of new
manufactures that become
better and cheaper over time
that manufacturing’s importance has been shrinking Figure 2

Manufacturing: A key provider of goods for
over the last few decades, in line with the emergence private household consumption
of the “post-industrial” society. The empirical evidence
used to substantiate this claim is typically based on
Overview
60
Share of manufacturing in total private consumption of households (percent)

the nominal value added produced in manufacturing
industries as a share of nominal gross domestic prod-
uct (GDP). At first glance, both at the global level and
among specific country groups, the value of manufac- 40
turing production has declined relative to other sec-

tors, suggesting a process of deindustrialization.
This conclusion, however, is driven by the produc-
tion angle. When demand is placed at the centre of 20
attention, other features become as important. What
matters for consumers is not the share of manufactur-
ing in nominal GDP but the creation of new manu-
factures that become better and cheaper over time.
0
The empirical evidence presented in this report high- Eora Multi-Region
Input-Output database
OECD Inter-Country
Input-Output Tables
World Bank International
Comparison Program dataset
lights the importance of manufacturing in providing
an increasing variety of goods at prices that decline Note: All values are for 2011 and in current $. Values are unweighted averages of all countries
included in each source. In the World Bank International Comparison Program dataset,
relative to those in other sectors of the economy— manufacturing consumption is defined following the approach put forth in Duarte (2017) (see
Annex C4, Table C4.1).
providing “affordable variety for all.” Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen
et al. 2012; Lenzen et al. 2013), OECD (2017c) “Inter-Country Input-Output Tables, 2016
edition,” oe.cd/icio, (accessed on September 6, 2017) and the 2011 International Comparison
Program dataset (World Bank 2015).
From a consumer perspective, the importance of
manufacturing has increased over the past 25 years
One way of analysing the importance of manufactur-
ing from the consumer angle is to look at its share in Manufacturing accounts for the bulk of
GDP when prices are kept constant, to provide an consumption expenditures…
indication of changes in the quantities of goods man- The importance of manufacturing from a demand
ufactured. From this perspective, the sector’s contri- perspective is not confined to its share of GDP. It
bution to real GDP increased over the past 25 years. also plays a key role as a provider of goods, a point
When one looks at the share of manufacturing keep- that stands out clearly in final consumption statistics.
ing prices constant at the 2010 level, there is no evi- Most of the items people consume daily are produced
dence of global deindustrialization. On the contrary, by manufacturing. As data from household expendi-
between 1991 and 2014 the share of manufacturing ture surveys reveal, on average more than half of the
in real GDP increased, from 14.8 to 16.0 percent (see world’s consumption spending goes to manufactured
Chapter 1, Figure 1.5). goods (Figure 2).1
1. The first and second bars in the figure are based on national account statistics, while the third bar is based on household expenditure sur-
veys. That explains the large differences between sources. National accounts-based statistics include an imputation for the “consumption” of
household services that is not present in expenditure surveys and hence reduces the share of manufacturing goods. Differences also exist in the
sectoral disaggregation used. National accounts use industry-based classification while household surveys use consumption specific classifica-
tions. In the latter the definition of manufacturing is not straightforward and does not match exactly with the industry-based classification.
This report uses a classification put forward in Duarte (2017).
3
“ Interactions between demand
and supply enable the diffusion
of new, better and ever cheaper
goods for consumers
…and consumption is a major driver of industrial Technology strengthens the interactions between
development demand and supply
Industrial development does not occur in a vacuum. In this interplay of demand and supply, innovation is
It can take place only if there is sufficient demand not limited to creating new products and improving
Overview
for manufactured goods. Consumers thus play a existing ones. Innovation is also required to reduce
key role in the emergence and consolidation of transactions costs, enabling producers to reach their
manufacturing sectors. Domestic consumption is a target markets. Improved airfreight, shipping contain-
key component of demand, but external demand— ers and modularity are a few of the innovations that
through exports—is also important for industrial accelerated the flow of goods to markets in the past,
development. helping their diffusion. Today, information and com-
munication technologies (ICTs) allow firms to tap into
Interactions between demand and supply previously inaccessible sources of demand by establish-
ing an instantaneous connection with consumers.
Industrial development, demand diversification
and income creation interact strongly The virtuous circle of industrial
For a new manufactured good to be introduced to development: Creating income,
the market, demand is needed. A high initial price diversifying demand and massifying
and few applications render a good accessible only to consumption
high-income households. As the sector consolidates
and gains scale, prices fall, making the good afford- The relationship between consumer
able to more consumers. With enough demand in demand and industrial development
place, the good becomes mass consumed—“massified”
—a llowing for further exploitation of scale econo- As incomes grow, demand diversifies away from
mies, the entry of new firms, greater competition and necessities towards other goods and services
further declines in prices. This interactive process Shifts in consumption patterns and shifts in the composi-
between demand and supply enables the diffusion tion of the economy are inter-dependent. As income rises,
of new, better and ever cheaper goods for consumers the budget share households allocate to necessities and
alongside the expansion and development of new sec- basic goods declines—a relationship known as Engel’s
tors and related providers. Law (Figure 3). Demand shifts from food and other neces-
sities towards increasingly sophisticated products and ser-
Computers and other goods exemplify these vices, providing new opportunities for sectors to emerge.
interactions
When introduced, computers were so large and expen- Some goods are luxuries, others necessities
sive that almost no individual could afford one. Only Not all manufactured goods respond to changes in
after the invention of the micro-processor in the income in the same way. Demand for some goods
1970s could computers become “personal.” They still increases more than proportionally as income rises; they
remained a niche market, however. By the 1990s, after are known as “superior” or “luxury” goods. Demand for
two decades of rapid technological progress, contin- other goods increases less than proportionally; they are
ual quality improvements and declining production known as “inferior” goods or necessities.
costs, computers had become essential tools at home Income elasticities—the change in consumption
and work. Similar trajectories are seen in the life cycle that occurs when income rises by 1 percent—illustrate
of other manufacturing durables, such as washing this distinction. Products such as cars, motorcycles
machines, cars, telephones and televisions. and jewellery are typically classified as superior goods,
4
“ A salient feature of
successful manufactures is their
broad‑based diffusion across
households and global regions
Figure 3
The share of household spending on food declines as income rises
100
Share of food and non-alcoholic beverages in household spending (percent)
Overview
75
50
25
0
0 10,000 20,000 30,000 40,000 50,000 60,000
GDP per capita (constant 2011 PPP$)
Note: All values are for 2011. GDP is gross domestic product and PPP is purchasing power parity. Classification of food and non-alcoholic beverages consumption is based on Annex C4, Table C4.1.
Source: UNIDO elaboration based on the 2011 International Comparison Program dataset (World Bank 2015) and World Development Indicators (World Bank 2017b).
because their elasticity tends to be greater than 1. In “massify.” A salient feature of successful manufactures
contrast, pharmaceuticals, clothing and footwear can is their broad-based diffusion across households and
be considered necessities, because their average elastic- global regions (Figure 4). The diffusion of most goods
ity is less than 1 (Figure 2.5). follows the traditional S-shaped pattern: At first, only
a few individuals adopt the new good, but soon dif-
Whether a good is a luxury or a necessity varies fusion begins to climb, as more and more households
by income levels of countries and over time adopt it. The rate of adoption then begins to level off,
The response of different manufactured goods to as fewer and fewer households remain that have not
changes in income depends on consumers’ location and adopted the product. Eventually, the S-shaped curve
socioeconomic status; it also changes over time, reflect- reaches its asymptote. The good has become a mass
ing different stages of the life cycle of manufactures. product.
Within a country, the same product can be a luxury
for the lowest-income segment and a necessity for the After a certain point, demand tends to satiate,
highest-income segment (Figure 2.6). Over time, goods driving structural change
introduced at high prices and accessible only by high- An important feature of demand is the tendency
income households can become necessities, as innova- to satiate—to reach the point at which household
tions reduce their prices and broaden their applications. expenditure ceases to rise in response to increases
in income. Satiation is crucial in driving structural
Demand massifies when luxury goods accessible change from the demand side. The slowdown in
only to a few households turn into necessities demand growth causes resources to shift from sec-
and are consumed by all tors supplying goods for which demand has satiated
When luxuries turn into necessities that the vast towards new sectors that produce goods for which
majority of households can afford, they are said to demand has not yet been satiated.
5
“ Central to the process of
demand diversification and
massification is the growth of
the manufacturing sector
Figure 4
Over the past decades, household consumption of durable manufacturing goods has spread at an
increasing rate around the world
a. Industrialized economies b. Developing and emerging industrial economies

Overview
100 100
Household ownership (percent)
Colour television
Refrigerator Vacuum cleaner
Colour television
Washing machine
75 75
Mobile telephone
Washing machine
Telephone
Refrigerator Mobile telephone
Personal
Passenger car computer
50 50 Telephone
Personal Vacuum
Bicycle computer cleaner
Smartphone
Microwave oven
25 25
Bicycle Passenger car

Motorcycle Microwave oven Motorcycle
Smartphone
0 0
1980 1985 1990 1995 2000 2005 2010 2016 1980 1985 1990 1995 2000 2005 2010 2016
Note: Industrialization level classification is based on Annex C1, Table C1.2.

Source: UNIDO elaboration based on Euromonitor International (Economies and Consumers; Possession of Household Durables, 2016).
Why industrial development is important systematic downward trend relative to prices in all
other sectors in the economy, fundamentally influenc-
Industrial development plays a key role as a ing the weight of manufacturing in national accounts.
prime provider of new goods As a result, the sector is on the decline in nominal
Central to the process of demand diversification and terms but not in real terms. The tendency towards
massification is the growth of the manufacturing falling relative prices lies at the heart of the industrial
sector. Manufacturing firms are the key providers of sector and reflects its inherently higher potential for
new goods and increased variety within any economy. productivity growth relative to agriculture or services.
People’s daily lives have been radically transformed by Continuous increases in productivity are passed on
successive waves of technological revolutions, all initi- to consumers in the form of lower prices, stimulat-
ated in the industrial sector. These waves significantly ing further demand and allowing firms to invest in
increased the set of goods available for consumers— expanding production and employment (Figure 5).
and continue to do so today.
…and can therefore be massively consumed
Thanks to advances in productivity, competition As a result of the fall in prices, demand for manufac-
and innovation, these goods tend to become less tures massifies. Technological innovation and mass
and less expensive… production are therefore intertwined. Process inno-
Underlying all industrial revolutions, from the first vations reduce production costs, enabling producers
until today’s fourth, is a process of continuous price to tap into mass consumption markets. Mass produc-
reduction, enabled by productivity gains, product tion facilitates further process innovations by increas-
and process innovation and competition in product ing learning-by-doing and specialization benefits.
markets. Output prices in manufacturing display a There is an iterative causality between productivity
6
“ As income grows, discretionary
income leads to demand for new
products, which spurs manufacturing
firms to engage in production
Figure 5
Relative price of manufacturing in decline compared with the global economy
200 1.1
Implicit gross value added deflator (index, 1990 = 100)
Relative price of manufactures
Overview
175 1.0
150 0.9
125 0.8
Deflator, total economy

100 0.7
Deflator, manufacturing industries
75 0.6
1991 1995 2000 2005 2010 2014
Note: Implicit gross value added deflator is calculated as the ratio between world value added at current prices and at constant prices of 2010. The relative price of manufactures is calculated as the
relationship between the deflator of manufacturing industries and the total economy.
Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO 2017f).
improvements in manufacturing and the rise of a mass services required discretionary income. Only with the
consumption society: As productivity improves, the greater efficiency of production brought about by the
price of consumer goods falls, generating larger mar- first industrial revolution could ordinary people start
kets, inducing further improvements in productivity to accumulate income beyond what was necessary
and creating a virtuous circle of productivity gains and for basic sustenance. Improved efficiency, with the
expanding markets. increasing income created by new sectors from invest-
ment and wages, explains the creation of discretionary
This causality can be illustrated as a virtuous circle income, which leads to the process of growing product
An increase in the discretionary income at the disposal quality and differentiation. How does the circle work?
of consumers—thanks to lower prices and increased
earnings—sets in motion a series of interrelated effects Increases in discretionary income lead to demand
that foster income gains and welfare through the con- diversification and the creation of new industries
sumption and production of manufactured goods that provide a greater variety of products
(Figure 6). Along the circle new sources of income are An increase in discretionary income leads to diver-
created for consumers, workers and entrepreneurs.2 sification of demand away from necessities towards
Until the end of the 19th century, most people other goods, creating new opportunities for the
allocated the largest share of their income to necessi- emergence of new sectors. As income grows, neces-
ties. The acquisition of more sophisticated goods and sities are more easily satisfied, and part of the new
income—d iscretionary income—i s allocated to
other types of expenditure. When demand for a new
2. The conceptual underpinnings of this circle are rooted in well- product increases to a sufficient scale, it spurs manu-
established contributions from the specialized literature including
Foellmi et al. (2014), Kaldor (1967), Matsuyama (2002) and Saviotti facturing firms to engage in production of the prod-
and Pyka (2013). uct. Investment shifts towards the emerging sectors,
7
“ With firms now able to
pass productivity increases
on to consumers, luxuries turn
into necessities affordable
by yet more households
Figure 6
The virtuous circle of manufacturing consumption: The global economy
Overview
Increase in New income

Augmented discretionary income shifts demand from
purchasing power
necessities to
of all consumers
other goods
Price
effect
Variety
effect
Volume
effect
Competition Consolidation of
and innovation industry increases
increase efficiency Massification of production efficiency
further manufacturing demand
increasing variety in the economy and improving the of goods that had once been affordable only by a few.
nominal income of those workers and entrepreneurs With firms now able to pass productivity increases on
directly and indirectly involved in the new production to consumers in the form of lower prices, luxuries turn
(the “variety effect”). into necessities affordable by yet more households.
Demand for these products becomes massive, and new
Increased production efficiency in new industries income opportunities are created for firms serving the
reduces prices and enables demand massification, new sources of demand (the “volume effect”).
opening new opportunities for producers
As emerging manufacturing industries consolidate, Further increases in production efficiency reduce
they gain scale and increase efficiency, through pro- prices even more, increasing the purchasing power
cess and managerial innovations. Manufacturing of all consumers and lifting discretionary incomes
industries appear to grow in a cumulative fashion: The The process of production efficiency gains does not
continuous expansion of production leads to further stop there. Even when goods have diffused among
improvements in efficiency, reflecting learning dynam- all consumers, inter-firm competition, alongside the
ics. This expansion accelerates the growth of produc- constant introduction of innovations, leads to fur-
tivity within the sector and the economy as whole. ther gains in production efficiency and price declines.
When productivity increases as a result of economies This reduction in prices now affects the vast majority
of scale, as well as advances in technology and organi- of consumers, including the early and late adopters of
zation, production costs decrease, reducing the prices the new goods. The purchasing power of all consumers
8
“ Affordable variety contributes
to increasing consumer welfare
across all segments of society
increases (the “price effect”), as does the discretion- …and broaden their set of choices, creating
ary income they can allocate to new varieties of non- more variety in the economy
essential manufactured goods, restarting the circle Closely related to welfare gains from new goods and
once again. It is this process of continuous diversifi- price reductions is the increase in variety. Recent
Overview
cation of demand over time that gives impetus to the research finds that access to a wider variety of imports
emergence of new industries and the creation of new increased consumer welfare by 2.2–2.6 percent of real
varieties of goods—a key requirement for sustaining income in the United States between 1970 and 2000
economic development over the long term. (Broda and Weinstein 2006).
How consumers benefit from the Affordable variety and the Sustainable
virtuous circle Development Goals
Affordable variety and consumer welfare Affordable variety helps countries achieve SDG 9
(“Build resilient infrastructure, promote inclusive and
Manufacturing creates affordable variety for all sustainable industrialization and foster innovation”)
and helps create the income needed to purchase Welfare is not limited to the mere expansion of consump-
these items tion options. The virtuous circle is also a critical under-
The most visible result of the virtuous circle is that a pinning for attaining inclusive and sustainable industrial
continuous stream of products—some radically new development, particularly SDG 9. The diversification of
and initially expensive, others increasingly affordable consumer preferences drives industrial development.
improvements on previous innovations—reaches the When preferences steer away from the consumption of
vast majority of consumers. New goods and a greater goods that are damaging to the environment or society,
variety of products transform the physical environ- industrialization leads to greater inclusivity and sustain-
ment, as well as habits and social relations. New ability. Acting directly on consumers, industrial develop-
income is generated via direct and indirect channels, ment can contribute to achieving other SDGs.
through the combined effects of greater variety and
volume and the decline in relative prices. Affordable Affordability supports poverty alleviation
variety contributes to increasing consumer welfare Falling relative prices for consumer goods can contrib-
across all segments of society. ute to poverty reduction. The channel towards pov-
erty reduction is reinforced when product and process
Cheaper and better goods improve consumers’ innovations are designed to address lower income
welfare… segments of society. Innovations that redesign prod-
The introduction of a new good can be considered an ucts and delivery systems to adapt them to the needs
important source of consumer welfare. The polio vac- of low-income communities can increase the welfare
cine, frozen food and personal computers are a few of the poor. Examples range from the introduction of
examples of new goods that raised life expectancy and environmentally sound sanitation technology in tra-
productivity. The decline in prices and improvement in ditionally neglected areas of India to the provision of
quality of these goods constitute major sources of wel- affordable computers to rural residents in China.
fare for consumers. Subject to technological progress in
industry, prices for consumer goods have experienced a New and affordable food products contribute to
long-term downward trend over the past century that food security
has contributed to an unprecedented improvement in The price channel is also one of the fundamen-
consumers’ purchasing power and welfare. tal determinants of equitable access to safe and
9
“ Global demand can be a powerful
source of income generation
sustainable food for consumption. As long as competi- incomes to be created. A key aspect of the virtuous cir-
tion exists in product markets, increased variety will cle is that demand diversification, as well as price, vari-
bring down prices, increasing access. The reduction ety and volume effects, help generate this critical mass
in prices for agricultural products may also occur as a of incomes. At the global level, the incomes generated
Overview
result of the productivity increases in the rural sector feed back into the circle as increased (global) demand.
that accompany technological changes in manufactur- The world at large benefits—regardless of where pro-
ing. Agricultural machinery and fertilizers, for exam- duction and consumption take place.
ple, bring huge benefits to consumers, contributing to
food security. In a globalized economy, demand and production
are not necessarily in the same place
New and affordable medicines work towards For open economies in a globalized world, however,
ensuring healthy lives mechanisms can leak (or inject) new sources of income
The production of affordable, quality-assured generic and demand outside (or within) the domestic econ-
medicines in low- and middle-income countries can omy. Growing domestic demand for a product can, for
increase equitable access for all consumers. In such instance, be satisfied entirely by imports in countries
countries barriers to access to essential medicines that with few industrial capabilities, hampering the work-
are safe to use can be onerous. Public health facilities ings of the virtuous circle. Figure 7 shows the possible
sometimes provide generic medicines for free or at a mechanisms through which demand may leak or be
very low cost, but availability is often low and quality injected in an individual economy.
difficult to assess. If pharmaceutical firms adhere to
good manufacturing practices, local production can Income generation depends on who serves final
provide quality-assured medicines at affordable prices. demand and how
In open economies, when new or existing varieties
New and affordable household consumption of goods are imported for domestic consumption,
durables support the achievement of gender domestic demand leaks towards foreign production. A
equality decline in the prices at which domestically produced
Affordable variety can also help narrow gender dis- goods are exported reduces nominal incomes in the
parities. The widespread diffusion of household appli- domestic economy (see the red dashed lines in Figure
ances increases the opportunity cost associated with 7). But global demand can also be a powerful source of
spending time on unpaid home-based activities, which income generation. It can take the form of injections of
women are generally expected to take on. The time demand or increases in the purchasing power of domes-
released can be spent on market-oriented activities. tic consumers thanks to imports of cheaper goods from
Evidence that labour-saving technology may influ- abroad (see the green solid lines in Figure 7).
ence the distribution of unpaid housework within the
household, however, remains ambiguous. Capturing income from demand
Income creation and access to affordable Demand is split into two sources, domestic and
variety foreign
Initiating and sustaining the virtuous circle requires
At the country level, access to affordable variety an increase in demand for locally produced manufac-
requires a critical mass of income tured goods. This demand can be either of domestic
Access to affordable consumer products has major or foreign origin. To foster industrialization, policy-
implications for consumer welfare but requires enough makers need to consider the attributes of each.
10
“ Industrialized economies
generally rely the most on foreign
demand, and least developed
countries on domestic demand
Figure 7
The virtuous circle of manufacturing consumption: The domestic economy
Decline Global
Overview
in global demand
prices for new
varieties
Increase in
Price
effect
Variety
Decline in prices of Domestic wages effect Diversification of
massified goods and profits manufacturing demand Imports
Volume
effect
Massification of
Global
demand
for existing
varieties
Imports
Domestic demand Globalization has made foreign demand increas-

ingly important for all country groups. This trend was
Domestic demand is the most important most evident in 1990–2000 (since 2000 the relative
component, especially in developing countries size of domestic absorption in developing and emerg-
Domestic absorption (the sum of private household ing industrial economies has been growing again,
consumption, gross capital formation and final con- thanks largely to rebalancing, notably in China, par-
sumption by government and non-profit institutions) tially reversing the trend of the previous decade).
is the main driver of final demand for manufacturing
—at the world level and across countries at different The importance of domestic demand as a source
stages of industrial development (Figure 8). of income has increased across all country
Differences exist, however, across the world’s four groups in recent years
country groups (industrialized economies, emerging An analytical approach based on international input-
industrial economies, other developing economies, and output tables captures the mechanisms linking
least developed countries). Industrialized economies gen- domestic and foreign demand to income creation. The
erally rely the most on foreign demand, although even in approach shifts the focus from the value added gener-
these countries, domestic absorption remains by far the ated in the manufacturing sector to the income (or
largest component (accounting for about two-thirds of value added) created by the consumption of final man-
the total). Least developed countries show the greatest ufactured goods—regardless of the sector in which
reliance on domestic demand (about 90 percent). income is generated.
11
“ Whether trade‑driven
industrialization has a beneficial
effect depends crucially on how
countries adjust their terms of trade
Figure 8
Changing trends in the relative importance of domestic demand for final manufactures
100
Share of domestic absorption in final manufacturing demand (percent)
Overview
Least developed countries
90
Other developing economies
Emerging industrial economies
World
80
70
Industrialized economies
60
1990 1995 2000 2005 2010 2013
Note: Domestic absorption comprises private household consumption, gross capital formation, and final consumption by governments and non-profit institutions. Each line shows the unweighted average
of the indicator for the world and country groups. Industrialization level classification is based on Annex C1, Table C1.2.
Source: de Macedo and Lavopa (2017) based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013).
The analysis shows that domestic demand is the main Foreign demand
contributor to the creation of domestic value added in
developing and emerging industrial economies. In con- The income created from foreign demand depends
trast, foreign demand is more important in industrialized on how countries adjust their terms of trade
economies (Figure 3.7). The findings also reveal a gener- The relationship between foreign demand for domesti-
alized movement in recent years towards greater reliance cally produced goods and income creation is not unidi-
on domestic demand, particularly in developing regions. rectional. Whether trade-driven industrialization has
Between 1990–2000 and 2000–2013, emerging indus- a beneficial effect depends crucially on how countries
trial economies experienced a particularly rapid accelera- adjust their terms of trade. If countries consistently
tion of income creation, as final demand for manufac- fail to upgrade their manufacturing export portfolios,
tures relied increasingly on domestic markets (Figure 3.8). for instance, they run the risk of seeing their terms of
trade deteriorate, as commodification processes push
Some country groups rely more on domestic industrial production in these countries towards infe-
demand than others rior goods. Increasing the technological content of
Overall trends mask variations across regions. In devel- exports and upgrading quality can offset persistent
oping and emerging industrial economies in Africa and declines in terms of trade. Innovation and technical
especially Asia and the Pacific, reliance on domestic change are therefore key for improving export prices
demand grew between 1990–2000 and 2000–2013. and the terms of trade, which are crucial for long-run
Developing countries in Latin America experienced economic growth.
slightly declining growth rates, accompanied by a Whether and to what extent a country gains from
marked increase in the importance of domestic mar- its interactions with the global economy along the vir-
kets. Only in Europe did the importance of domestic tuous circle depends largely on the relationship between
demand decline between the two periods (Figure 3.9). the value of its manufacturing exports and the price of
12
“ The manufacturing income terms
of trade reflects the ‘purchasing
power’ of manufacturing exports
its imports. A measure that captures this relationship is of manufacturing exports in the emerging industrial
the manufacturing income terms of trade (MITT). The economies in the Asia-Pacific region in 2003–2014,
MITT reflects the “purchasing power” of manufactur- for instance, reflects increases in export volumes,
ing exports—how much a country can import using the which outweighed the moderate decrease in the man-
Overview
income generated by the exports of its manufacturing ufacturing barter terms of trade (the ratio between
sector. As one would expect, there is a close positive the price of a country’s manufactured exports and
correlation between income levels and MITT: Richer imports). Emerging industrial economies in the Asia
countries not only export more, they also export goods and Pacific region seem to have increased their export
with higher technological content (Figure 4.3). volumes by lowering prices (Figure 4.6).
Greater purchasing power of manufacturing exports In other cases, diversification and quality
is associated with higher per capita income growth upgrading increase the purchasing power of
A strong positive correlation also exists between the manufacturing exports
changes in the purchasing power of manufacturing Other country groups display different dynamics
exports and growth of per capita income: Country and the increase in the purchasing power of manu-
groups that improved their MITT most rapidly facturing exports is driven by improvements in
between 2003 and 2015 also grew faster (Figure 9). export prices. This seems to be the case, for example,
in the other developing economies in Africa, where
In some cases, a higher volume of exports at the increase in the MITT is mostly explained by an
declining prices increases the purchasing power increase in the manufacturing barter terms of trade.
of manufacturing exports Countries can increase export prices by diversifying
Price or volume effects can drive improvements in the the composition of their export baskets and upgrad-
MITT. The rapid increase in the purchasing power ing the technological content of their exports’ active
Figure 9
Increasing the purchasing power of exports is associated with higher growth rates in per capita GDP
250
Change in manufacturing income terms of trade (index, 2003 = 100)
Other developing economies, Europe
Least developed countries, Asia and Pacific Emerging industrial economies,

Other developing economies, Asia and Pacific Asia and Pacific
200
Other developing Emerging industrial economies, Europe

economies, Africa
Industrialized economies,
150 Europe
Asia and Pacific
Other developing economies, Americas
Emerging industrial economies, Americas

100
Americas
Emerging industrial economies, Africa
50
20 40 60 80 100 120
Growth in GDP per capita (percent)
Note: All values for the period 2003–2014 are in constant 2003 PPP$ (PPP is purchasing power parity). GDP is gross domestic product. Outliers with changes of over 500 percent relative to the base
year have been omitted. Regional and industrialization level classifications are based on, respectively, Annex C1, Table C1.1 and C1.2.
Source: UNIDO elaboration based on BACI International Trade Database (Gaulier and Zignago 2010).
13
“ Wages are not just a production
cost—they are also a fundamental
driver of aggregate demand
product lines. Between 2003 and 2014 increases in the high income inequality may have too few consum-
average product complexity of exports correlate posi- ers to sustain domestic manufacturing production
tively with changes in the manufacturing barter terms (Figure 2.17).
of trade. The same observation applies to technologi-
Overview
cal upgrading in active product lines (Figure 4.8). This An expanding middle class increases opportunities
evidence supports the view that technological upgrad- to generate income from domestic demand
ing is a crucial means of avoiding persistent declines in Improvements in the distribution of income and, in
a country’s terms of trade. particular, the size of the middle class are key factors
fuelling domestic demand for manufactures and driv-
Rising unit values for manufactures are associated ing income creation along the circle. This report shows
with long-run growth in GDP per capita a clear positive correlation between the growth rate
The need for technological upgrading for domestic of value added induced by domestic manufacturing
income generation becomes even more apparent when demand and the expansion in the share of people in
one looks directly at the relationship between manu- the middle-income segment between 2001 and 2011
facturing export prices and economic growth. The (Figure 3.11).
long-run impact of increases in a country’s manufac-
turing export unit values, which are typically used as Increasing real wages foster domestic demand
proxy for export prices, on domestic income generation and drive income generation
appears to be broadly positive, across all country groups Wages are not just a production cost that needs to be
and regions (Figure 4.13). Given the strong association reduced to achieve greater competitiveness. They are
between technological content and unit values, there also a fundamental driver of aggregate demand—
seems to be strong evidence in favour of upgrading the and are more likely than other sources of income to
technological content of exports to capture incomes be spent on consumption items. The average annual
from the global demand of manufactures. growth rate of domestic value added generated by
domestic absorption of final manufactured goods in
Keeping the virtuous circle turning 2001–2011 is positively correlated with the growth
rate of real wages (Figure 3.10).
A critical mass of income must be
generated within the economy—and it Diversification of consumption baskets fuels
should be well distributed income creation
The creation of incomes from domestic demand is also
High inequality within countries can hamper the positively correlated with the diversification of domes-
diffusion and massification of goods tic private household consumption of manufactures.3
An income distribution that is highly skewed towards Countries that diversified their consumption baskets
the rich is likely to dampen the consumption of the most between 2005 and 2011 tended to have the
domestically produced manufactures, because the highest annual growth rates in income generated by
wealthiest households have different consumption domestic absorption of manufactures (Figure 3.12).
patterns from the rest and their preferences are more
easily met by imports. Countries with household 3. The diversification of domestic consumption was estimated using
ownership rates of common consumer durables (such data from the World Bank’s International Comparison Program
as washing machines and vacuum cleaners) that are database. These data were used to estimate proxies for the degree of
diversity in manufacturing consumption baskets at the country level
lower than expected for their income level tend also to in 2005 and 2011. Diversification was defined as the change in this
have below-average income equality. A country with index between the two years.
14
“ Industrial capabilities must be
in place for domestic producers
to serve growing demand
Measuring the industrial capabilities manufactured goods competitively and achieve struc-
needed tural transformation. Countries that in the early
2000s ranked higher on the CIP index were more
Benefiting from these factors requires industrial successful in capturing incomes from the three factors
Overview
capabilities between 2001 and 2011. The positive relationships
These three factors—expansion of the middle class, appear stronger for countries with higher CIP rank-
real wage growth and diversification of domestic ings, particularly for real wage growth and diversifica-
consumption—are critical to industrial develop- tion of domestic demand (Figure 10).
ment and the functioning of the virtuous circle. Not
all countries may be able to exploit them to the same Balance-of-payments tensions must be
degree. Industrial capabilities must be in place for avoided
domestic producers to serve growing demand.
UNIDO’s Competitive Industrial Performance As income grows and demand diversifies,
(CIP) index provides a way to assess countries’ leakages to imported goods increase
industrial capabilities. It captures in a single meas- Domestic constraints to market size can imperil the
ure the ability of countries to produce and export virtuous circle. International conditions can, too.
Figure 10
Higher industrial capabilities are needed to benefit from middle class expansion, real wages gains
and diversification of domestic consumption
Expansion of the middle class Growth in real wages Diversification of domestic consumption
a. Countries above median rank of the CIP index c. Countries above median rank of the CIP index e. Countries above median rank of the CIP index
25 25 25
Income growth generated by domestic absorption of manufacturing goods (percent)
20 20 20
15 15 15
10 10 10
5 5 5
0 0 0
–5 –5 –5
–40 –20 0 20 40 60 –10 –5 0 5 10 –0.2 –0.1 0.0 0.1 0.2 0.3
Change in share of the middle class in Growth of average real wages (percent) Absolute change in the diversity index of
total population (percentage points) manufacturing household consumption
b. Countries below median rank of the CIP index d. Countries below median rank of the CIP index f. Countries below median rank of the CIP index
25 25 25
20 20 20
15 15 15
10 10 10
5 5 5
0 0 0
–5 –5 –5
–10 0 10 20 30 –10 0 10 20 –0.3 –0.2 –0.1 0.0 0.1 0.2 0.3
Note: All values are for the period 2001–2011 in panels a, b, c and d, and for the period 2005–2011 in panels e and f. Income is in current $ and wages are in constant 2011 PPP$ (PPP is purchasing
power parity). Income growth induced by domestic demand is estimated following the approach proposed in de Macedo and Lavopa (2017). See Chapter 8 for details regarding the calculation and
analysis of UNIDO’s Competitive Industrial Performance (CIP) index. In the case of consumption diversification, because the measure used refers to 2005–2011, countries are split according to the CIP
ranking in 2005. In all other cases, countries are split according to the CIP ranking in 2001.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013), the 2005 and 2011 International Comparison Program dataset (World Bank
2008 and 2015), Penn World Table 9.0 (Feenstra et al. 2016) and Kochhar (2015).
15
“ Countries must lift the purchasing
power of their manufactured exports
to avoid excessive pressures
on their external accounts
In open economies where domestic demand leaks income and generate foreign exchange, particularly
towards the consumption of imports, market-size when they export labour-intensive manufactured
gains from economies of scale and productivity often goods that are easy to imitate. The resulting compe-
benefit foreign producers instead of domestic ones.4 tition exerts downward pressure on prices. In these
Overview
This appears particularly relevant against the current conditions an export-oriented strategy to diversify
backdrop of increasing cross-border fragmentation of from primary into manufactured goods will struggle,
production, or “globalization,” which is reflected in unless policy-makers pursue export diversification and
growing import shares in final domestic absorption upgrading.
of manufactures and increasing foreign content in
domestically produced goods. The price channel must be kept working,
and consumers given information on goods
Countries need to generate foreign exchange to
fund increasing imports Productivity increases in manufacturing are
As countries get richer consumer preferences diversify passed on to consumers if relative prices decline
from less sophisticated domestically sourced goods As manufacturing productivity increases, output
to imported ones, and goods produced domestically prices decline, because unit costs fall—a crucial
tend to draw increasingly on inputs and components underpinning of the virtuous circle. This price chan-
sourced abroad. For this reason, foreign exchange nel needs competition in product markets to ensure
requirements generally increase and countries must that productivity increases are passed on, in whole or
take steps to lift the purchasing power of their manu- in part, to consumers as lower prices.
factured exports, in order to avoid excessive pressure Barriers to competition may arise within value
on their external accounts. chains. Consumer welfare is hurt when firms enjoy
If growing domestic consumption is satisfied rents from their dominant position in a sector or
through imports without an equivalent expansion in chain. For the circle to be sustained, the relative
exports, economic growth is likely to hit balance-of- prices of manufactured products should be allowed to
payments problems. The need to strengthen export decline to reflect productivity growth, and barriers to
capabilities, especially in emerging industrial econo- competition should be reduced.
mies rebalancing their economies, is critical.
Lack of information on quality and safety of
Globally declining prices could lead some consumer goods can harm the circle’s welfare gains
countries into commodity traps The supply of environmentally unsustainable or sub-
Not all export strategies are sustainable over time. standard products (such as counterfeit drugs) dimin-
Global declines in the prices of certain categories of ishes consumer welfare. Lack of information on the
goods can push countries into “commodity traps,” quality and safety of consumer goods may greatly
where their gains from exports will deteriorate over reduce the welfare gains from the virtuous circle. The
time. This, in turn, crimps their potential to raise introduction of stringent quality and safety standards
is therefore important for the circle to stay virtuous.
4. This negative effect can be counterbalanced by other benefits
that imports bring to the domestic economy. Imports of capital Quality and safety standards also lead to
and intermediate goods that are of higher quality than those avail- increased market access
able domestically can increase the productivity of importing firms. In a trade environment that is increasingly driven by
And if domestic firms are capable of absorbing the foreign technol-
ogy embodied in imported goods, imports may result in knowledge technical regulations and quality standards, compli-
spillovers and productivity gains. ance with standards ensures that firms in developing
16
“ Access to good labour
conditions is a key constituent of
an industrialization agenda with
social inclusiveness at its core
and emerging industrial economies continue to enjoy Other potentially negative societal impacts
market access—and even increase their export shares Industrial jobs can be hazardous, even deadly, particu-
in industrialized economies. Upgrading the quality larly in lower income countries with labour-intensive
of goods for export is therefore essential to remain plants and weak employment and environmental
Overview
competitive. standards. The health and well-being of the wider
community may also suffer from unchecked pollution.
Challenges to social inclusiveness Access to good labour conditions and a healthy envi-
and environmental sustainability ronment is a key constituent of an industrialization
agenda with social inclusiveness at its core.
Social inclusiveness and income inequality
Concentration of production in a few industrial hubs
Incomes created along the circle may not flow to More broadly, how inclusive the circle is at the global
the poorest people in society level depends on the extent to which countries benefit
The virtuous circle does not itself guarantee socially from its income-generation mechanisms, as well as
inclusive or environmentally sustainable outcomes. the modality in which they participate. When coun-
Social inclusiveness requires that at least two condi- tries remain caught in the lower segments of global
tions are in place. First, part of the income generated production—or are left out altogether—the circle can-
by the circle should flow to the poorest people in soci- not be regarded as globally inclusive.
ety, increasing welfare at the bottom of the pyramid.
Second, traditionally marginalized groups should be Gains from the circle are becoming geographically
able to participate fully in the market. concentrated
Several global trends hinder these aspirations. In 1990 about half of manufacturing production in
When the largest share of income goes to highly developing and emerging industrial economies came
skilled workers, the inclusiveness of the circle is weak- from the five largest economies in the group (Brazil,
ened. The trend towards greater automation of pro- China, India, Indonesia and Mexico). In 2016 these
duction skews the distribution of profits towards fac- five countries accounted for roughly three-quarters
tory owners and managing directors, to the detriment of the group’s total, with China alone shooting up to
of workers. Excessive concentration of income at the 55 percent of that total, from 15 percent. This trend
top of the distribution also has detrimental effects on raises concern about the circle’s potential to drive
the circle’s functioning, as a critical mass of income is social inclusiveness worldwide (Figure 7.4).
needed to launch the process.
Technology has the potential to change the
Price declines may be abetted by falling labour geography of production
standards ICT can help producers—including producers in
Without regulation, national or international, com- countries that are currently marginalized in interna-
petitive pressures in global markets can undermine tional production networks—tap hitherto inaccessible
social inclusiveness. Many global value chains are markets. When combined with emerging technolo-
highly cost-effective, but few provide much social gies that enable new forms of manufacturing—such as
protection, particularly for the low-skill and low- additive manufacturing or 3D printing—it can help
tech links (where competitive pressures are stronger). entrepreneurs access world markets for mass custom-
In these conditions the virtuous circle may not be so ized articles. Innovations in manufacturing can lead
virtuous, instead benefiting groups of consumers in towards a more even distribution of production activi-
industrialized economies at the expense of workers. ties across borders.
17
“ Since the early 1970s, the
world has been consuming natural
resources faster than the earth
has been producing them
Environmental sustainability—or lack of it Climate change is a heavy source of long-term

pressure on the environment, especially in poorer
Mass consumption puts pressures on the countries. Between 2020 and 2100, annual growth of
environment GDP per capita could fall from 3.2 percent to 2.6 per-
Overview
The growing mass consumption of manufactured cent as a result of climate change–related impacts on
products is likely to increase demand for non- capital accumulation and total factor productivity
renewable natural resources, such as fossil fuel energy (Moore and Diaz 2015).
and materials, putting severe pressure on the environ- Waste is also a growing problem. Increased income
ment. Manufacturing also generates huge amounts of generates more packaging, imports, electronic waste
waste, putting current disposal systems under mount- and appliances. Although waste is projected to peak by
ing pressure. The virtuous circle is thus characterized 2050 in the countries comprising the Organisation for
by binding environmental constraints. Economic Co-operation and Development (OECD)
and by 2075 in Asia and Pacific, it will continue to
Current consumption patterns may be rise in the fast-growing cities of Sub-Saharan Africa
unsustainable (Hoornweg et al. 2013).
Since the early 1970s, the world has been consum-
ing natural resources faster than the earth has been Environmental pressures from increasing living
producing them (Figure 11). There is no guarantee standards are still too strong…
that natural resource–based economic activities Carbon dioxide emissions (Figure 5.6) and the use
will continue once the stock is depleted. The cur- of materials (Figure 5.7) increased in manufactur-
rent path of production and consumption may be ing between 1995 and 2014. The trend of emissions
unsustainable. and materials consumption in manufacturing can be
Figure 11
Global biocapacity went into the red nearly half a century ago
4
Global hectares per person
3
Ecological footprint
Ecological reserve
Biocapacity
Ecological deficit
2
0
1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013
Note: Global Footprint Network refers to global biocapacity as “the ecosystems’ capacity to produce biological materials used by people and to absorb waste material generated by humans, under current
management schemes and extraction technologies.” The ecological footprint is defined as the amount of biologically productive land and water needed by an entity— individual, population or activity
—to facilitate the production of all consumed resources and to absorb the waste generated in this process. An entity’s footprint is measured in global hectares and given the global nature of trade, the
footprint takes into account land and sea from all over the world. Read more definitions related to the National Footprint Accounts at: http://data.footprintnetwork.org.
Source: Global Footprint Network National Footprint Accounts, 2017 Edition (Global Footprint Network 2017a).
18
“ Expanding markets for
‘environmental goods’ would
contribute to a sustainable virtuous
circle of manufacturing consumption
understood by using a decomposition approach that for new products come from old products. As much
investigates the impact of three main components: as possible, everything is reused, remanufactured,
the scale effect (the increase in environmental pressure recycled back into a raw material, used as a source of
from higher living standards and consumption), the energy, or as a last resort, disposed of.”
Overview
intensity effect (the decrease in environmental pres-
sure per unit of value added or consumption as a result What prevents a rapid transition towards the
of technological change) and the composition effect full massification of environmental goods?
(changes in environmental pressure from variations Environmental goods have not completed their tran-
in the sectoral composition of consumption and pro- sition towards massification: Over the period 1988–
duction patterns). The scale effect is preponderant in 2014 environmental goods, as classified by the OECD
explaining the increase of emissions and use of materi- list,6 despite a growing trend accounted for less than
als, especially in emerging economies (Figure 5.8). 8 percent of world exports (Figure 5.11; Cantore and
Cheng 2017). A variety of obstacles impedes consum-
Reconciling industrialization with environmental ers from moving towards goods characterized by a
protection lower environmental impact.
Expanding markets for “environmental goods” would
contribute to a sustainable virtuous circle of manu- High production costs and consumer prices
facturing consumption (Figure 12).5 With such mar- The production of environmental goods requires
kets, industrial firms would be able to replace fossil higher-cost materials and production techniques. When
fuel inputs with renewable energy sources. Business the consumption of a good is price elastic, consumers
models that help firms increase their resource effi- tend to prefer more affordable goods and are generally
ciency would also promote sustainability. By adopt- unwilling to pay a premium for environmental goods.
ing circular economy models, for instance, countries Fortunately, the prices of many environmen-
could radically transform the management of waste tal goods are dropping radically, because of learning
by enabling a “closed loop” of material use between effects and technological change. Light-emitting diode
production and consumption. All these developments (LED) lamps, for instance, could soon complete their
would help mitigate environmental impacts, allowing massification process and fully replace less energy-effi-
the production of larger volumes of output with fewer cient lamps.
inputs (Bourguignon 2016).
Other factors affecting the consumption of
Fostering the circular economy environmental goods
The full operationalization of the sustainable virtu- The medium- and long-term savings associated with
ous circle of consumption is consistent with the reali- the consumption of more energy-efficient products
zation of a circular economy. According to UNIDO influence consumers. But consumers do not always
(2017a), in a circular economy “products are designed shift their preferences to goods with a lower envi-
for durability, reuse and recyclability, and materials ronmental footprint rapidly enough to decouple eco-
nomic growth and environmental degradation.
The purchase of an environmental good is based
5. Industrial Development Report 2018 defines environmental goods
as those that respond to basic needs and bring a better quality of life on three crucial stages. First, consumers become
while minimizing the use of natural resources and toxic materials as
well as the emission of waste and pollutants over the life cycle of the
service or product so as not to jeopardize the needs of further gen- 6. This list is presented and discussed in Steenblick (2005). As the
erations. This definition is inspired by the Oslo Symposium of 1994 author emphasizes, however, the OECD list of environmental goods
(Norwegian Ministry of Environment 1994). is far from exhaustive and does not cover all environmental goods.
19
“ Policy‑makers should strike
a balance between policies that
target supply and demand
Figure 12
A sustainable virtuous circle of manufacturing goods
Less environmental Lower costs incurred for

environmental remediation increase
Overview
damage incomes for purchase of goods
Augmented Increase in New income

purchasing power discretionary shifts demand from
of all consumers income necessities to
other goods Green industrial
Massification of environmental Price production generates
goods leads to further declines effect new varieties of goods
in their prices
Variety Efficient use of
Diversification of
Decline in price of Decline in prices of Global wages effect materials, fossil
manufacturing
environmental goods massified goods and profits energy and adoption
demand
of clean energy
Volume
effect
and innovation Massification of industry increases
increase efficiency production efficiency
further manufacturing
demand
Recycling contributes
to inputs availability and
new varieties of products
Reuse and remanufacturing of wasted products Less waste
further enhances massification of goods
aware of the environmental threat and keen to help them. Labelling and marketing campaigns for
mitigate it through consumption. Second, they environmental goods can also generate profits for
acquire the necessary information about the impact firms (Figure 5.20).
of environmental goods on the environment. Third, • Perceptions that companies may make exaggerated
they buy the environmental good, on the basis of claims or even lie about their products’ environ-
their pro-environment attitude and their trust mental attributes prevent wider diffusion of sus-
that the good delivers the expected environmental tainable and energy-efficient products.
impact. At all three stages, biases may affect con-
sumer behaviour: Managing demand for manufactured
• Too little public awareness about the seriousness goods
of the impending environmental threat is a bar-
rier. In one survey almost half the respondents in Moving from findings to action
some industrialized economies believed the envi- The virtuous circle involves a recursive process of
ronmental impacts to be overstated (OECD 2014). income generation, product diversification, quality
• Lack of information on products, costs and, in upgrading, mass consumption and changes in vol-
some instances, potential savings also hinders con- umes and relative prices of manufactured products. It
sumption of environmental goods. Labelling and draws links to innovation, production efficiency and
certification can help highlight the environment- productivity gains. Various conditions set the circle in
friendly attributes of products, as well as the mon- motion. How can policy-makers in developing coun-
etary benefits, steering consumers towards buying tries turn these findings into areas for intervention?
20
“ Governments may directly
intervene in the economic system,
foster partnerships or underpin
the private sector’s role as the
driver of industrialization
Economic goals remain top priorities in industrial Governments may directly intervene in the economic
policy debates system, foster partnerships or underpin the private
Because countries differ significantly in their produc- sector’s role as the driver of industrialization.
tive and technological capabilities, as well as policy-
Overview
making abilities, industrial policy remains open to Framework conditions
learning and experimentation in search of practi- Framework conditions can either constrain or open
cal ways to conciliate distinct, and often conflicting, windows of opportunity for industrialization. When
approaches to industrialization. Policy-makers should demand is perceived as a framework condition,
strike a balance between policies that target supply, responses are generally supply driven (including trade-
demand, or both, considering the risks of government or exchange rate-related regimes, fiscal incentives, com-
intervention and the changing environment for indus- petition and labour policy reforms, incentives for diver-
trial policy. sification and technological upgrading), connected to
at least one of three possible government roles:
A demand perspective to industrial policy • Facilitating the removal of market failures, so that
The contribution of demand for manufactured goods domestic firms can build on current comparative
and related services to structural change should not be advantages.
underestimated. Changes in demand can either con- • Promoting domestic technological and productive
strain or enhance opportunities for industrialization. capabilities, to favour entry into sectors otherwise
The extent to which demand drives industrialization impossible to develop given the country’s tradi-
depends on factors such as the size of the economy and tional comparative advantages.
the domestic market, the strength of domestic tech- • Supporting development of capacities to help
nological and manufacturing capabilities, the natural domestic firms identify or anticipate demand
resources endowment, the extent of international col- changes (such as through technological foresight
laboration and insertion into global value chains and or related practices).
the relative weight granted to domestic or external
markets for domestic manufactured products. Actionable variables: Four government roles
With actionable variables, government can play four
A continuum: From framework conditions to major roles to steer demand towards inclusive and
actionable variables sustainable industrialization goals, alone or in combi-
Demand for manufactured goods can be interpreted nation: regulation (their traditional role), knowledge
as a variable along a continuum. At one end, demand brokerage (to signal market opportunities or desired
can be a framework condition, partially or completely directions for industrialization and related consumer
outside the control of policy-makers. In this case, gov- behaviour), active promotion of industrial innova-
ernment can work as (a mix of) facilitator, technologi- tion and public procurement of manufactured goods.
cal capability-building partner or market antenna. At Table 1 presents a schematic of various government
the other end, demand can be an actionable variable roles in relation to demand.
in industrial policy intervention. In this case, govern-
ment can work as (a combination of) information pro- Examples of demand-driven industrial
vider/awareness raiser, regulator, enabler/co-generator policies
of innovation or consumer (through public procure- Developing and emerging industrial economies
ment). The two cases lead governments to assume in Africa, Asia and Latin America exemplify how
distinct roles and implement different combina- demand-driven policies have been deployed in pursuit
tions of supply- and demand-oriented interventions. of economic, social inclusiveness and environmental
21
“ Government can steer demand
towards inclusive and sustainable
industrialization through regulation,
knowledge brokerage, innovation
promotion and public procurement
Table 1
Government roles and industrial policy interventions for demand as a framework condition or an
actionable variable
Nature of demand/
Overview
role of government Description of intervention Examples of interventions

Framework condition
Facilitator of industrialization Remove market failures so that firms can • Fiscal, monetary, exchange rate and
and upgrading build on comparative advantages to take employment policies
advantage of external demand conditions • Provision of credits or loan guarantees
or opportunities for industrialization. • Incentives for foreign direct investment
(FDI)
• Export promotion and competition policies
Technological capability- Promote adoption, use and (eventually) • Selective industry protection
building partner development of technologies that enhance • Creation of public research centres
knowledge bases and presence in • Promotion of corporate research and
domestic and international markets. development (R&D)
• Technology transfer mechanisms and joint
venture agreements
• Export promotion
• Import substitution
• Selective FDI
• Skills training
Market antenna Help domestic agents identify or anticipate • Foresight services and market intelligence
changes in technologies with implications
for the dynamics of manufacturing.
Actionable variable
Information provider and/or Influence consumer knowledge, • Communication, education and
awareness raiser awareness, readiness and capabilities to awareness-raising campaigns
consume certain manufacturing products. • National brands
• Voluntary labelling
Regulator Stimulate and regulate consumption of • Fiscal (taxes, tariffs, quotas, subsidies,
manufacturing products or influence tax credits or exemptions); monetary; and
consumer behaviour through changes in exchange rate policies
relative prices.
Influence consumption of manufacturing • Mandatory standards and labels
products or guide consumer behaviour
through laws, directives and regulations.
Enabler/co-generator of Promote, enhance or create demand for • Grants and subsidies for consumption of
innovation innovative products by targeting final users. innovation
Consumer Promote consumption of manufacturing • Public procurement
products, guide strategic investments
in innovation, address societal needs
through provision of manufactured
goods and ensure a market for strategic
industries or economic activities.
Source: UNIDO elaboration based on Santiago Rodríguez and Weiss (2017), Santiago Rodríguez et al. (2017) and Lin and Chang (2009).
sustainability goals, often simultaneously. Time procurement (such as local content requirements in
is frequently of the essence, despite the policies’ South Africa’s railway or Sri Lanka’s ICT sector);
heterogeneity. adoption of standards and certification (quality
upgrading and export promotion in Rwanda’s coffee
Economic goals sector); and knowledge and information to influence
Policy-makers have adopted instruments to create consumer awareness and choices to foster demand for
demand for strategic sectors or firms, dismantling bar- domestic producers (national branding campaigns in
riers to participating in international trade, informing Ecuador and Uganda). Public demand, in combina-
consumers about the quality and safety of consumer tion with regulation and fostering aggressive market
goods and so on. Examples include strategic public orientations, can enable domestic firms to respond to
22
“ Demand‑driven policies
can be tailored to suit different
government roles and intended
development outcomes
emerging demands in certain market segments with stimulate different, more sustainable consumption
potential to sustain growth over the medium to long patterns. In its first 30 years the Montreal Protocol
term (aircraft manufacturing in Brazil). achieved the almost total phase-out of five groups of
ozone-depleting substances and an almost 40 per-
Overview
Social inclusiveness goals cent reduction in the consumption and production
Policy-makers can facilitate access to goods, reduce of hydrochlorofluorocarbons, with a view to phasing
their price and enhance their quality. Examples them out entirely by 2030.
include health reform in Mexico and regional efforts
to reduce the cost of essential medicines in Latin International partnerships contribute to inclusive
America through pooled procurement. and sustainable industrialization
Countries can also seek to ensure equal access Governments can partner with international organi-
by manufacturers from societal sectors that were zations to accelerate progress towards inclusive and
deprived of or face unfavourable access to markets. sustainable industrialization. Leveraging comple-
Examples include quotas in strategic public procure- mentary assets and international expertise within
ment for women-led enterprises in the Dominican the framework of national industrial strategies has
Republic and preferential access and capacity building multiple benefits. International bodies help coun-
for small and medium-size enterprises in Sri Lanka’s tries meet consumer demand in advanced economies
ICT sector. by strengthening compliance with quality and safety
standards.
Environmental sustainability goals
To render the virtuous circle environmentally sustain- Policies are heterogeneous
able, countries must remove barriers and stimulate Demand-driven policies can be tailored to suit dif-
drivers for massifying environmental goods. They can ferent government roles and intended development
do so through market- or regulatory-based policies. outcomes. Those policies are better understood within
Direct incentives to consumers seek to reorient complex policy mixes, in interaction with supply-
industrial activity towards cleaner processes or the driven interventions. There is scope for synergies:
adoption of more environmental-friendly products Decisions made by a ministry of industry can affect
and services. Examples include subsidies for buying areas such as health, and decisions made by ministries
“new-energy vehicles” in China and the Republic of of health (or other social sectors) can signal gaps in the
Korea. Governments can also enhance perceived ben- development of domestic manufacturing activities.
efits through consumer education and awareness rais- Governments need to set clear priorities and goals and
ing or affect demand for environmental goods directly be aware of possible trade-offs between policy tools
through public procurement. and intended targets. Enhanced monitoring and eval-
International policy coordination can be invalu- uation is needed to better codify experiences in the use
able, as domestic efforts seem insufficient to address of demand-driven policy instruments.
global environmental challenges. One example of
successful coordination is the Ecolabel, introduced Finally
in 1992 as a third-party certified standard to pro- Governments should carefully consider the scope of
mote products and services with reduced environ- demand-driven interventions to address social- and
mental impacts in the European market. Another is environment-related outcomes, helping better align
the Montreal Protocol of 1987. Changes in the inter- the virtuous circle with the objectives of inclusive and
national regulation of production were key drivers to sustainable industrial development.
23
Part A
Demand for
manufacturing:
Driving
inclusive and
sustainable
industrial
development
25
Chapter 1
Bringing “affordable variety” to all
A new perspective: Demand determining consumer welfare. Moreover, the price of

The consumption of manufactured goods is both one any good on the market will determine whether—and
of the prime forces driving economic development to what extent—existing demand is satisfied.
and one of its most visible results. As income rises, A renewed focus on demand also entails a re-assess-
households tend to diversify their consumption pat- ment of the importance of the manufacturing sector.
terns away from basic needs (food and shelter) towards In terms of the creation of goods—regardless of their
a more sophisticated variety of goods and services. value or the number of jobs created—the importance
New demands create new markets, which in turn give of manufacturing at the global level has increased in
rise to the emergence of new industries. These indus- the past few decades, not declined. The main reason
tries expand, achieve optimal scale of operations and, behind the decline of manufacturing’s relative size in
through a process of continuous technological inno- terms of value and jobs created as countries get richer
vation and competition, bring down prices for the is one of the main attributes of industrial development
new goods, making them affordable for an ever-larger —bringing less expensive and higher-quality goods to
number of people. Along this process, new incomes everyone.
are generated, both directly (through higher wages A demand perspective towards industrial develop-
and profits in the new or expanding industries) and ment also entails an analysis of the positive effects on
indirectly (through the real income effect). Income living standards and consumer welfare of new varieties
gains push demand towards larger volumes and fur- and qualities of goods affordable for all. Introducing
ther diversification, create new market opportunities new goods or upgrading the quality of existing goods
and lead to the creation of new goods and services and improves the welfare of consumers by making certain
the emergence of new industries or the sophistication wants easier to satisfy. The reduction in prices also has
of existing ones, restarting the circle in a self-reinforc- a real income effect, allowing consumers to purchase
ing fashion. more (and different) goods with the same monetary
This report examines the core mechanisms behind income.
this process and identifies the main challenges and Shifting the focus towards demand also stresses
opportunities that arise from them. The starting point the important contributions of industrial develop-
is a reassessment of the importance of manufacturing ment towards achieving the Sustainable Development
from a demand perspective (Box 1.1). Historically, dis- Goals (SDGs), as defined in the United Nations (UN)
cussions on industrialization have focused on supply- 2030 Agenda for Sustainable Development. A demand
side perspectives—at the expense, in part, of demand perspective reveals that it is the diversification of con-
variables and their interaction with supply. sumer preferences that spurs industrial development.
A renewed focus on demand means that several When preferences steer away from the consumption of
variables acquire analytical significance. From a supply- goods that are damaging to the environment or soci-
side perspective, one would need to consider the inter- ety, industrialization leads to greater inclusivity and
play and trade-offs between sales, profits, wages and job sustainability, thus achieving SDG 9 (“Industry, inno-
creation. From a demand perspective, the consumer’s vation and infrastructure”).
perspective becomes central, making it necessary to Examples beyond SDG 9 include poverty allevia-
consider variables such as product quality, variety and tion, through the provision of more affordable goods
price. The quality and variety of products on the mar- for the “bottom of the pyramid”1 (SDG 1); increases
ket at any point in time play a fundamental role in in food security and health, through the provision of
27
“ A demand perspective entails an
analysis of the positive effects on
living standards of new varieties and
qualities of goods affordable for all
1 Box 1.1
What is demand?
“Demand” refers to the preference on the part of any eco- Private consumption expenditure by households generally
nomic agent (household, firm, government) to acquire a constitutes the largest share of a country’s expenditure. It
good or service at a given price. Individuals and house- is determined by individuals’ disposable income, as well
holds purchase a range of goods and services for con- as their accumulated wealth and savings. Demographic
sumption. Firms purchase new equipment and build plants and cultural factors also affect private consumption pat-
to increase production. Governments procure goods and terns. Public consumption expenditure, which over the
services that are put to use for the benefit of citizens. The short run may follow a pro- or countercyclical pattern,
process of satisfying each of these needs is a fundamen- has substantial influence on aggregate demand. It tends
tal driver of economic activity. Demand for any good or to increase with a country’s income level. Gross capital
service sets in motion a chain of activities that spurs addi- formation consists of investments in fixed assets by pro-
tional demand, ranging from hiring labour to purchasing ducers residing in the country, as well as additions to the
new machinery. value of assets by producers.
When goods are employed in the production of other In open economies intermediate and final demand
goods, demand is defined as “intermediate.” These goods can originate in the country where production takes place
include raw materials and other inputs. Intermediate (domestic demand) or abroad (foreign demand). Final
goods are completely consumed (or transformed) in pro- demand originating in the country is typically labelled
duction and do not add to the stock of fixed capital assets. “domestic absorption.” It is not necessarily spent on
Because manufacturing requires larger amounts of inputs domestically produced goods; it includes the purchase of
than other sectors, larger shares of intermediate consump- both local and foreign goods. Purchases of foreign goods
tion are associated with a higher level of industrialization. by domestic actors (demand “leakages”) will not neces-
Moreover, as countries industrialize, the share of services sarily generate further incomes for domestic producers
in intermediate demand tends to increase, a reflection of or have domestic multiplier effects. In contrast, exports
the upgrading of manufacturing activities. Both the level of domestic goods abroad (demand “injections”) will
and composition of intermediate consumption are there- generate incomes and multiplier effects in the domestic
fore indicators of a country’s industrialization. economy.
“Final” demand is demand for goods that are not Both domestic and foreign sources of demand are
consumed during production. It consists of three main crucial for industrialization. They push firms to invest,
components: private consumption expenditure, public increase their productivity and endeavour to meet new
consumption expenditure and gross capital formation. sources of demand.
good-quality food and medicines at affordable prices nominal gross domestic product (GDP). This metric
(SDG 2 and 3, respectively); improvements in gen- shows that the global share of manufacturing in nomi-
der equality, through the creation and diffusion of nal GDP fell from almost 20 percent in 1991 to less
household consumer durables (SDG 5); and the cross- than 16 percent in 2014 (Figure 1.1).2
cutting theme of ensuring sustainable consumption Technological advances and the robotization
and production patterns (SDG 12). of production processes have reduced the need for
workers in manufacturing. Manufacturing’s share of
Has manufacturing become more employment has trended downward, even with a short
important or less? reversal from 2003 to 2007, falling from 14.5 percent
A common view holds that the importance of the in 1991 to 11.5 percent in 2014 (Figure 1.2).
manufacturing sector in the economy has been Productivity differentials drive these trends. Real
shrinking in the past few decades, as the “post-indus- value added per manufacturing worker is higher than
trial” society has emerged. The empirical evidence to it is in the economy as a whole—and globally the dif-
substantiate this claim is typically based on the nomi- ference has grown, not shrunk, since 1991 (Figure 1.3).
nal value added produced in the sector as a share of Manufacturing has driven the increase in productivity
28
“ The decline in the share of
manufacturing in world GDP
results from faster gains in
productivity which are translated
into declining relative prices
Figure 1.1
Declining trend in manufacturing’s nominal
Figure 1.2
Falling share of manufacturing workers in 1
share of world GDP world employment
20 20
Manufacturing share in GDP (percent)
Manufacturing share in total employment (percent)

18 18
16 16
14 14
12 12
10 10
1991 1995 2000 2005 2010 2014 1991 1995 2000 2005 2010 2014
Note: All values are in current $. GDP is gross domestic product. Source: UNIDO elaboration based on the databases Key Indicators of the Labour Market (2013
Source: UNIDO elaboration based on the Manufacturing Value Added database 2017 (UNIDO 2017f). and 2015) and Trends Econometric Models (ILO 2016).
of industrialized and developing economies (see, for Figure 1.3

Increasing wedge between world real value
example, Szirmai et al. 2013 and UNIDO 2013 and added per worker in manufacturing and the
2015b). As a result of increases in productivity, the total economy
need for workers per unit of value added produced in 40

Value added per worker (thousands constant 2010 $)
manufacturing has declined, as has manufacturing’s

share of world employment. 35
More rapid gains in manufacturing productivity Manufacturing industries
have also translated into lower relative prices when 30

compared with the rest of the economy. Increases in
manufacturing prices have been systematically lower 25
than overall inflation in the global economy (see
Figure 1.4, left axis). This difference is particularly Total economy
20
clear after 2002, when the wedge between both series
broadens significantly. The result of these trends is
15
that the relative price of manufactured goods when
compared with the overall economy has been falling
10
systematically in the last 25 years. In 2014 the price 1991 1995 2000 2005 2010 2014
of manufactured goods compared with the total econ- Source: UNIDO elaboration based on the Manufacturing Value Added database 2017 (UNIDO
omy was only 70 percent of what it was in 1991 (see 2017f) and the databases Key Indicators of the Labour Market (2013 and 2015) and Trends
Econometric Models (ILO 2016).
Figure 1.4, right axis).
In view of these trends, the sharp decline in the
nominal share of manufacturing in world GDP ultimately is the result of faster gains in productivity,
observed in Figure 1.1 is not surprising. The decline which are translated into declining relative prices.
29
“ New manufactured goods
tend to be introduced at relatively
high prices and become less
expensive and therefore affordable
by more people over time
1 Figure 1.4
Relative price of manufacturing in decline compared with the global economy
200 1.1
Implicit gross value added deflator (index, 1990 = 100)

175 1.0
150 0.9
125 0.8

100 0.7
75 0.6
1991 1995 2000 2005 2010 2014
Note: Implicit gross value added deflator is calculated as the ratio between world value added at current prices and at constant prices of 2010. The relative price of manufactures is calculated as the
relationship between the deflator of manufacturing industries and the total economy.
Source: UNIDO elaboration based on the Manufacturing Value Added database 2017 (UNIDO 2017f).
Examining the share of manufacturing using real Figure 1.5

Increasing trend in the real share of
values reveals a very different picture, in which there manufacturing in world GDP
is no evidence of global deindustrialization. On the 20
Manufacturing share in GDP (percent)
contrary, globally, the share of manufacturing in

real GDP increased by more than 1 percentage point
between 1991 and 2014 (Figure 1.5). 18
If we were to look at real values using 1991 as the

base price year (instead of 2010, as in Figure 1.5), the
16
share of manufacturing would be even larger—over
20 percent of the economy.3 This is because most man-
ufactured goods are much less expensive today than 14
they were decades ago.

New manufactured goods tend to be introduced
12
at relatively high prices and become less expensive
and therefore affordable by more people over time.
Globally, the quantity of manufactures increased 10
1991 1995 2000 2005 2010 2014
faster than that of other goods and services, and prices
Note: All values are in constant 2010 $. GDP is gross domestic product.
of manufactures fell significantly more than prices of Source: UNIDO elaboration based on the Manufacturing Value Added database 2017 (UNIDO 2017f).
other goods and services.
These trends indicate that even though the share
of manufacturing in nominal GDP has fallen, the can afford to buy them can be stable or even increase.
importance of manufacturing in terms of the volume This is in line with the findings of Rowthorn and
of goods produced and the number of consumers who Coutts (2004), who argue that the decline in the share
30
“ Manufacturing plays a much
bigger role in consumption
than in GDP or employment
of monetary income spent on manufactured goods in

advanced economies has occurred not because the real
Program suggest that manufactured goods account for
more than half of world consumption (Figure 1.6).7
1
quantity of manufactured goods consumed is stagnat- These figures are two to three times larger than the
ing but because the relative prices of manufactured share of the sector in world employment or GDP, and

goods have fallen. In their view, rising imports from stress the prime role played by manufacturing indus-
low-wage countries alongside rising productivity at tries bringing a wide array of consumption goods to
home make manufactured goods in advanced econo- the world.
mies so inexpensive that consumers can buy much
more with a smaller fraction of their income. The benefits of affordable variety:
An exclusive focus on supply-side considerations Increasing consumer welfare, driving
in evaluating the evolving role of manufacturing may income creation and industrialization,
therefore be misleading. The importance of manu- and contributing to sustainable
facturing cannot be confined to its share in GDP. It development
needs to reflect the fact that most of the items people Manufacturing industries provide a growing variety
consume daily are in one way or another produced by of goods at prices that have declined relative to other
manufacturing industries. sectors of the economy. That is, they provide “afford-
Global statistics on consumption tend to be more able variety.” Creating new manufactured goods,
restricted than statistics on employment and produc- upgrading the quality of existing goods and reducing
tion. The prime sources are household expenditure
surveys. Almost all countries conduct these surveys, Figure 1.6
Manufacturing: A key provider of goods for
but comparability across countries and over time is private household consumption
much lower than for production-side measures, mak-
60
Share of manufacturing in total private consumption of households (percent)
ing cross-country comparisons more difficult.

Two broad sets of internationally comparable data
can be used. The first are international input-output
tables produced by international initiatives.4 They pro-
40
vide detailed information on the sectoral composition
of demand using harmonized sectoral classifications.
The second are cross-country compilations of con-
sumption baskets, such as the one undertaken by the
World Bank’s International Comparison Program, 20
a statistical initiative that collects national prices of

a well-defined basket of goods and services for most
countries (Duarte 2017).5 A similar initiative is the
World Bank’s recently released Global Consumption 0
Eora Multi-Region OECD Inter-Country World Bank International
Database, which focuses on emerging industrial and Input-Output database Input-Output Tables Comparison Program dataset
developing economies.6 Note: All values are for 2011 and in current $. Values are unweighted averages of all countries
Data from these sources reveal that manufactur- included in each source. In the World Bank International Comparison Program dataset,
manufacturing consumption is defined following the approach put forth in Duarte (2017) (see
ing plays a much bigger role in consumption than in also Annex C4, Table C4.1). For the manufacturing sector classification, see further Annex C2,
Table C2.2 and C2.3.
GDP or employment. Data coming from international Source: UNIDO elaboration based on Eora Multi-Region Input-Output database (Lenzen et al.
2012; Lenzen et al. 2013), OECD (2017c) “Inter-Country Input-Output Tables, 2016 edition,”
input-output tables indicate that manufacturing oe.cd/icio, (accessed on September 6, 2017) and the 2011 International Comparison Program
dataset (World Bank 2015).
accounts for about 30 percent of world consumption,
while data collected by the International Comparison
31
“ The decline in manufacturing
prices has been among the
most significant drivers of
overall welfare since the early
stages of industrialization
1 the relative prices of manufactures has a clear positive

impact on people’s daily lives.
of goods (such as radios, aspirin, computers, smart-
phones). The creation of new goods of better quality
What are the mechanisms that link the availabil- has held down the true cost of living, raising living
ity of affordable and varied goods to consumption and standards by much more than conventional measures
human welfare? How does industrial development indicate (Jong 2015).

drive and shape these mechanisms? Three pillars— Beyond the anecdotal evidence from historical
increasing consumer welfare, driving income creation records, substantial empirical work has been done to
and industrialization, and contributing to sustainable quantify the welfare implications of affordable variety
development—hold the answer. by estimating how much consumers are better off as
The next subsection looks at how the provision of a result of declines in the relative price of the goods
affordable variety affects consumer welfare, without they are already consuming; improvements in the
identifying the beneficiaries of such welfare gains or quality of goods they are already consuming that are
the types of goods provided. The following subsection not reflected in prices; the introduction of new goods,
examines the dynamic forces that drive this process for which there were no substitutes before; and overall
and the extent to which all countries can benefit from increases in the number of options (increased variety).
it. It analyses how the creation and consumption of The standard approach to capturing the effect of
affordable variety relates to industrial development price reductions on consumer welfare is to estimate
and can give rise to a virtuous circle of welfare and the demand curve for a specific good and measure the
income generation. The last subsection examines how changes over time in “consumer surplus”—the differ-
affordable variety contributes to achievement of the ence between what consumers are willing to pay and
SDGs.8 the actual price on the market. A traditional example
of this approach is the analysis of how improvements
New, better and more affordable goods in the technology used to spin cotton yarn into thread
increase consumer welfare affected the price of cotton fabric—and welfare—in
The decline in manufacturing prices has been among the early 19th century. Invention of the spinning mule
the most significant drivers of overall welfare since the (by Samuel Crompton, in 1779) and other efficiency
early stages of industrialization.9 As a result of tech- gains pushed down the cost of producing cotton yarn
nological progress, prices for consumer goods have in the United Kingdom by 90 percent between 1784
experienced a long-term downward trend over the and 1819. Leunig and Voth (2011) find that the fall
past century that has contributed to an unprecedented in the price of cotton yarn generated a welfare gain to
improvement in purchasing power and a widening consumers equivalent to about 6 percent of their con-
of the range of consumption options (DeLong 2000, sumption expenditure by 1820.
Jong 2015). Estimating the welfare gains from improved qual-
Consumers’ rising purchasing power can be cap- ity is more complicated, because a “price” needs to be
tured by looking at how many hours of work it takes associated with changes in quality. Some researchers
an average worker to buy a given good. In 1895 it took apply the concept of “hedonic pricing,” which assumes
the average American worker 260 work hours to be that the price of a marketed good is related to its char-
able to buy a one-speed bicycle. By 2000 that figure acteristics or the services it provides. Changes in qual-
had fallen to just 7 hours—less than 3 percent as long ity may be captured by changes in certain attributes
(DeLong 2000). of the product. With cars, for example, one attribute
Reduction in the price of existing goods is just is engine power. When a car’s engine power improves,
one way in which manufacturing has improved indi- the value (or “price”) of the car rises. If the market
viduals’ welfare. Another is by producing new types price of the car remains the same, the quality-adjusted
32
“ The interactions between
demand and production can create
a virtuous circle of development
that fuels the income needed to
purchase new, and better, goods
price falls. This decline is not observed in the market,

but it still increases consumers’ welfare.
China’s GDP between 1997 and 2008. Using a simi-
lar approach, Mohler and Seitz (2012) find high gains
1
These gains can be measured by estimating in welfare from newly imported varieties in countries
demand curves. Raff and Trajtenberg (1996) examine from the European Union between 1999 and 2008.

quality improvements in three attributes of automo-
biles between 1906 and 1940. They find that these Manufacturing consumption can be a
improvements were equivalent to a 2 percent annual powerful driver of industrial development
reduction in the real price of cars. and income creation
Access to new goods is also, in itself, a source of The interactions between demand and production can
consumer welfare. One way of estimating the effect create a virtuous circle of development that fuels the
of new goods on welfare gain is to posit that the new income needed to purchase new, and better, goods.
good existed before its introduction to the market To fully capture the effects of industrial development
but with a virtual price that was so high that no con- on people’s daily lives one needs to take into account
sumer would buy it. In such a case, the welfare gain the interlinkages between the creation of affordable
would be equivalent to the gain associated with a variety, the generation of incomes and the continuous
price reduction from the high virtual price—at which transformation of the economy.
consumption can be assumed to be equal to zero—to The immediate effect of an increase in the afford-
the price at which the good is introduced into the ability of manufactured goods is an increase in the
market (Creedy 2015). This method has been used to share of income households can allocate to other
estimate the consumer welfare gains of a wide array goods. The way in which this additional income
of goods, including cereal brands (Hausman 1996), is allocated depends on the initial level of income.
personal vehicles (Petrin 2002) and personal com- Poor households allocate most of their income to
puters (Greenwood and Kopecky 2013). Researchers basic needs, such as food and shelter. As their income
have found welfare gain for consumers in all cases, grows, they are able to allocate part of their additional
which are higher the more radical the new good is. income—the discretionary income—to other types of
The case of personal computers is quite illustrative in expenditures.
this regard. Greenwood and Kopecky (2013) calcu- Historically, industrial development was vital in
late the welfare effect of the introduction of the PC creating a critical mass of discretionary income, which
and subsequent product improvements, using quality- set in motion an unprecedented process of creation of
adjusted price deflators. They find the impact of the new varieties and qualities of goods (Saviotti and Pyka
PC between 1977 and 2004 was equivalent to 3 per- 2013). Until the end of the 19th century, most people
cent of total consumption expenditure. spent most of their income on necessities. The ability
Several researchers have identified a positive cor- to purchase higher-quality goods and services required
relation between increases in the variety of imported discretionary income, which emerged only through
goods and welfare (Broda and Weinstein 2004 the growing efficiency—in the production of existing
and 2006, Chen and Ma 2012, Mohler and Seitz goods—enabled by the industrial revolution.
2012). Broda and Weinstein (2004 and 2006) find Income gains are associated with changes in con-
that access to a wider variety of imports was associ- sumption patterns. The German statistician Ernst
ated with an increase in consumer welfare equiva- Engel postulated a non-linear relationship between
lent to 2.2–2.6 percent of real income in the United average incomes and the share of different categories
States between 1970 and 2000. Chen and Ma (2012) of goods in consumption baskets (Engel 1895). Some
estimate the welfare gain resulting from access to goods (such as cars, motorcycles, or jewellery) tend to
imported variety to be equivalent to 4.9 percent of increase more than proportionally as income rises;
33
“ As more people are able to
access them, luxuries become
necessities, and demand for
these products is ‘massified’
1 consumption of others (such as food and beverages,

clothing, or footwear) tends to decline, leading to a
innovations reduce manufacturing costs and enable
firms to tap mass consumption markets, while, at the
continuous process of diversification in demand. same time, mass production facilitates process inno-
Diversification of demand, in turn, leads to the vations by increasing learning-by-doing and speciali-
emergence of new industries and the creation of zation benefits. Productivity and mass consumption
new varieties in the economy, a key requirement for are therefore linked in a virtuous circle (Foellmi et al.
long-term economic development (Saviotti and Pyka 2014, Matsuyama 2002).
2004). As new manufacturing industries consolidate, In an influential analysis of 50 product categories,
they gain scale and increase efficiency (through pro- Tellis and Golder (1996) hypothesize that when a new
cess and managerial innovations), initiating a process product is introduced, it has low quality, a high price
of cumulative growth. Learning dynamics and the and few applications, limiting sales to certain market
development of large intra-sector linkages accompany segments. In their view, it is the process of tapping the
the expansion of manufacturing production, lead- mass market that provides the needed economies of
ing to further improvements in scale and efficiency scales and experience to raise quality, lower prices and
(Kaldor 1967). Productivity—in the sector as well as increase applications (Box 1.2). This dynamic char-
the economy as a whole—accelerates as a result. acterized the diffusion of several types of consumer
Gains in productivity in established industries goods in many industrialized economies after World
tend to reduce the prices of goods that were origi- War II, including vacuum cleaners, washing machines,
nally affordable for only a few. As more people are telephones, televisions, cars and air conditioners.
able to access them, luxuries become necessities, and After goods have diffused across all consumers,
demand for these products is “massified,” creating new inter-firm competition and the introduction of new
opportunities for firms serving that demand. Process innovations lead to a further drop in prices. These
Box 1.2
Tapping the mass market for film, video recorders and disposable nappies
Historically, the success of new consumer products— devoted millions of dollars to research on bringing it to
and the industries they spawn—has hinged on innova- market. After 20 years of research and innovation, by mid-
tors’ ability to foresee the emergence of a large market for 1970 they did so. Over the next 20 years, annual global
their products. Several examples illustrate how the profit sales of video recorders rose from $2 million to almost
opportunities provided by the mass market shape diffu- $2 billion at JVC, from $6 million to $3 billion at Matsushita
sion processes. and from $17 million to almost $2 billion at Sony. Over the
During the 19th century, photography remained same period, sales by Ampex increased only marginally,
restricted to professionals and to amateurs who could from $300 million to $480 million.
afford the equipment and master the technical complexities. Disposable nappies (diapers) have been available in
George Eastman’s invention of photographic film, in 1889, the United States since 1935, but the products marketed
created a mass market for photography. Thanks to his inno- by pioneer firms, such as Chux of Johnson & Johnson,
vation, more and more people could take pictures, remove were expensive. Sales therefore remained limited to
the exposed film from the camera and obtain finished prints wealthy households until the mid-1960s. Recognizing the
from a local photographer or specialized factory. By turning mass market potential of a high-quality and affordable
a niche product into an item of mass consumption, East- product, Procter & Gamble launched a cheaper brand,
man revolutionized the social role of photography. Pampers. By 1966, after 10 years of research, Pampers
The first commercial video recorders were introduced were marketed at about 5.5 cents a nappy. Over the next
in the United States in 1956, by Ampex, which remained seven years, the United States’ market for disposable
the leading supplier for several years. The high initial nappies expanded from $10 million to $370 million a year.
price ($50,000) constrained sales. JVC, Matsushita and Procter & Gamble had created a mass market.
Sony saw the mass market potential of this product and
Source: Tellis and Golder (1996).
34
“ Competition and innovation
lead to reductions in prices in
mass consumption products,
augmenting the purchasing
power of all consumers
declines increase the purchasing power of the vast

majority of consumers, allowing them to allocate more
New income is created through three main
channels:
1
discretionary income to new varieties of non-essential • Variety effect: Demand for new goods increases
manufactured goods. the income of workers and entrepreneurs directly

Figure 1.7 illustrates this process. An increase in and indirectly involved in the industries that
discretionary income sets in motion a series of inter- emerge to serve these new demands.
related effects that foster income gains and welfare • Volume effect: Demand massification of existing
through the consumption and production of manu- goods increases the income of workers and entre-
factured goods. First, demand diversifies from neces- preneurs directly and indirectly involved in the
sities into other “superior” goods, creating new oppor- industries that serve these enlarged demands.
tunities for the emergence of new industries.10 Second, • Price effect: The decline in the prices of mass con-
the new industries consolidate; improve production sumption goods improves the purchasing power
efficiency; and reduce prices, enabling the mass con- of all consumers, increasing their discretionary
sumption of their products and creating new oppor- income.
tunities for income creation as the size of production This simplified framework holds when one looks
expands. Third, inter-firm competition and innova- at the global economy as a single entity. The picture
tions lead to further reductions in prices in mass con- becomes more complex once one takes account of the
sumption products, augmenting the purchasing power fact that production and consumption are not neces-
of all consumers and keeping the circle turning. sarily located in the same economic area. Mechanisms
Figure 1.7
The virtuous circle of manufacturing consumption: The global economy
Increase in New income

Augmented discretionary income shifts demand from
purchasing power
necessities to
of all consumers
other goods
Price
effect
Variety
effect
Volume
effect
and innovation industry increases
increase efficiency Massification of production efficiency
further manufacturing demand
35
“ The inclusiveness of the virtuous
circle depends on the extent to which
different countries benefit from the
income‑generation mechanisms
1 can leak (or inject) new income and demands outside

(or inside) the domestic economy. Figure 1.8 illus-
the purchasing power of domestic consumers thanks
to imports of cheaper goods from abroad (green solid
trates these mechanisms by representing an individual arrow connecting global and domestic prices).
economy (the part of the figure that is inside the grey The inclusiveness of the virtuous circle of manu-
oval) circumscribed within a global economy (repre- facturing consumption depends on the extent to
sented by the bubbles outside the grey oval). which different countries benefit from the income-
Domestic demand can leak towards foreign pro- generation mechanisms of the circle. If some countries
duction (imports) of new or existing varieties of goods are left out of this dynamic process, the circle cannot
(as captured by the red dashed lines pointing outside be regarded as inclusive from a global perspective. If
the grey oval). Declines in the global prices of domes- the benefits from this process are concentrated among
tically produced manufactured goods can reduce the a small portion of households or regions within coun-
nominal income created in the domestic economy if tries, the potential to drive social inclusiveness at the
the country exports those goods (red dashed line con- country level will be greatly undermined. Chapters 2,
necting the decline in global prices with the domestic 3 and 4 examine these issues in further detail.
wages and profits). However, global demand can also Even if the circle is inclusive, a vital question
be a powerful source of income for the domestic econ- remains: Is it environmentally sustainable? Increased
omy, taking the form of either injections of demand for consumption of manufactured goods certainly leads
both new and existing varieties of goods (as shown by to further environmental degradation. Hence, it is
the corresponding green solid arrows) or increases in also necessary to examine whether and under what
Figure 1.8
The virtuous circle of manufacturing consumption: The domestic economy
Decline Global
in global demand
prices for new
varieties
Increase in
Price
effect
Variety
Decline in prices of Domestic wages effect Diversification of
massified goods and profits manufacturing demand Imports
Volume
effect
Massification of
Global
demand
for existing
varieties
Imports
36
“ The diffusion of less expensive
consumer goods increases
the purchasing power of all
consumers, including consumers
at the bottom of the pyramid
conditions the consumption of manufacturing can be

sustainable, a key issue analysed in Chapters 5.
Providing access to the bottom of the pyramid
Poverty is a multidimensional condition caused by
1
multiple inter-related factors. The SDG 1 targets high-
Affordable variety contributes to the SDGs light that deprivation is characterized by a lack of dis-

The analysis so far risks conflating welfare with the posable income as well as poor health; lack of educa-
mere expansion of consumption options, irrespective tion; poor quality of work; lack of political influence;
of what those options may be.11 Greater consumption and extreme vulnerability to violence, climate-related
may entail reliance on environmentally, or socially, events and other economic, social and environmental
damaging production processes. Should it lead to shocks (Alkire and Santos 2013).
the depletion of non-renewable natural resources, it Underlying all characteristics of living on less
may violate the principle of inter-generational equal- than $1.90 a day (the international poverty line) is the
ity. These issues have led to broader definitions of inadequacy of consumption options. Even when they
welfare.12 are willing to pay for them, the poor have less access
Nussbaum (1992) and Sen (2001) define welfare to basic consumer goods and services than wealthier
not by a mere increase in the ability to consume but by groups (Banerjee and Duflo 2007, Prahalad and Hart
the expansion in opportunities that consumption ena- 2002). In addition, the goods and services that are
bles. From this perspective, affordable variety matters available may be expensive, hazardous, and environ-
because it enables consumers to seek goods that may mentally unsustainable. These factors may reinforce
help them lead healthier, more satisfying and more one another, triggering a vicious circle of poverty and
informed lives. ill-being. In countries where medicines are costly, for
When welfare is understood in broader terms, the instance, lack of disposable income can translate into
quality of consumption matters. Two considerations poor health and vice versa. Reliance on solid fuels for
are particularly relevant. The first is whether consum- domestic heating and cooking in many rural areas
ers are given enough assurance about the safety of the in low- and middle-income countries is damaging to
products they buy. The introduction of norms and both health and the environment.
standards can lead to stricter control over products and The diffusion of less expensive consumer goods
value chains, to the benefit of consumers. The second is increases the purchasing power of all consumers,
the extent to which production processes are resource including consumers at the bottom of the pyramid.
efficient, clean and climate resilient. A welfare perspec- The higher real income from increased affordable
tive requires that the social and environmental impact variety can help lift some poor households above the
of any given consumption choice be considered. poverty line. The provision of affordable variety is
Availability of, and equitable access to consumer therefore one additional channel by which industrial
goods that are safe to use at reduced, or zero, social and development contributes in poverty alleviation.13
environmental impact is central to the 2030 Agenda The price effect is reinforced when product or pro-
for Sustainable Development. That agenda recognizes cess innovations are designed to address lower-income
the need for countries to acquire strong productive groups. Partly as a result of greater liberalization in
and technological foundations (SDG 9) in order to low- and middle-income economies since the 1990s,
ensure equitable access to consumption, but stresses there has been an increase in market-based strategies
that the environmental impact of current patterns in to deliver goods and services to the poor (Ramani
manufacturing production and consumption needs et al. 2009). Access to sanitation is a long-standing
to be drastically reduced, an objective of SDGs 9 and need in areas traditionally neglected by public and
12 (“Ensure sustainable consumption and production private sector providers alike. Innovations such as the
patterns”). Sulabh and Calvert toilet models pioneered in India
37
“ Lower prices may enable
households to expand and
diversify their dietary intake,
leading to improved nutrition
1 are environmentally sound solutions that meet the

requirements of lower-income consumers (Ramani
helping bridge the digital divide between rural and
urban areas in China (Li and Zhou 2007).
et al. 2012, Kothandaram and Vishwanathan 2008).
Synergies between affordable variety and the SDGs Promoting food security
are also evident in the production of low-cost generic Food security can be defined by five elements: the
medicines by pharmaceutical firms in low- and mid- availability of food in local markets; access to food
dle-income countries. In the Philippines, local firm by all households, in urban and rural areas; elements
RiteMed distributes affordable generics in a market pre- effective utilization of food in the household; elements
viously dominated by high-cost brand drugs. By 2007 stability of the domestic food supply; and elements
RiteMed had carved out a significant share of the mar- sustainability of the food system on which all these
ket by providing quality-assured generics at a fraction components depend (Timmer 2017).
of the price of brand-name medicines (Ganchero and Price is a fundamental determinant of access to
Pavia 2007). Other examples of bottom of the pyramid food. It works in two main ways. First, lower prices
innovations include rural sales programmes that deliver of all consumer goods increase the amount of money
a host of manufactured items—ranging from soap to households can allocate to food. They may also ena-
SIM cards—that were previously unavailable or too ble households to expand and diversify their dietary
costly, at affordable prices (Dolan et al. 2012). intake, leading to improved nutrition—a component
Innovation has also transformed durable consumer of welfare that features prominently in SDG 2.14
goods such as cars, generators and computers from Second, affordable variety can reduce the price of
inaccessible luxuries into items that may be within food. A reduction in prices of agricultural products
the reach of lower-income households. India’s Tata may occur as a result of productivity increases in the
Nano, the world’s most affordable car, went on the rural sector that accompany technological change
market in 2009 at a retail price of about $2,000. This in manufacturing. The increased use of agricultural
“frugal” innovation enabled steep reductions in price machinery (Pingali 2007, Steckel and White 2012)
while focusing on functionality by combining existing and fertilizer can increase food security.15
component technologies to produce a modular prod- There is, however, tension between greater con-
uct (Ray and Kanta Ray 2011). The car responded to sumption possibilities and environmental sustainabil-
heavy demand for affordable vehicles from consumers ity. Rising demand for food contributes to greenhouse
who had been able to afford motorbikes but not cars. gases emissions and puts pressure on land, freshwater
The Nano is not as fuel efficient as other, more resources and the ecosystem, with potentially dire
expensive products (or the motorbikes consumers used consequences.
before its introduction). Trade-offs can therefore arise Changes in demand and consumer perceptions can
between protecting the environment and ensuring help shape the circle of manufacturing consumption
that innovations remain accessible to lower-income and industrial development in the direction of greater
consumers (see Chapter 6). sustainability and safety. More stringent quality and
Innovations directed at the bottom of the pyramid safety standards along the food value chain have
need not be environmentally damaging. One example improved consumer welfare (Box 1.3). This trend is
is renewable energy mini-grid technology, which pro- observed in large emerging industrial economies, such
vides power to rural villages at affordable prices (Eder as China, where decades of rapid industrialization and
et al. 2015, Singh 2016). Innovations at the bottom of urbanization are driving the preferences of a growing
the pyramid can also increase social inclusiveness, as in niche of consumers towards higher-quality, safer and
the case of Beijing-based Tsinghua Tongfang, which less environmentally damaging products (Ely et al.
markets affordable computers designed for rural users, 2016, Garnett and Wilkes 2014) (see Chapter 5).
38
“ Improving access to medicine is
not just about price and availability;
critically it also requires that
medicines are of high quality
Box 1.3
Enforcing standards in food products 1
Consumers in high-income markets are increasingly con- metrology and product testing. One example is UNIDO’s
cerned with the quality, safety and provenance of food support in increasing standard compliance within four of

products, leading to the emergence in recent years of a Ghana’s key agro-industrial value chains (fish products;
plethora of standards regulating trade in agricultural prod- fruits and vegetables; cocoa; and wood products). UNI-
ucts.1 Food standards play a key role in transmitting cred- DO’s intervention led to the development of national qual-
ible information to consumers with regards to the quality ity and safety standards. Local laboratory testing capac-
of the products they purchase, as well as on the condi- ity was also established, alongside a product traceability
tions under which these are produced, processed and system to increase market confidence.
transported. In this context, compliance with food safety Exports can now be traced back to the farm, enabling
and quality standards is increasingly considered as a pre- rapid identification of the source of any noncompliance
requisite for food exporters in developing countries to tap with standards and safety requirements. Local produc-
into foreign markets (UNIDO 2015c). ers receive reliable certification services for ISO 9001 and
Yet achieving full compliance with international stand- ISO 22000 (quality standards by the International Organi-
ards and regulations can be a daunting prospect, as these zation for Standardization [ISO]) management systems at
affect the entire value chain, from inputs down to process- affordable prices. Moreover, inspections of product safety
ing and packaging. Exporters need proof that their prod- are now conducted in line with best international prac-
ucts conform to international requirements from inter- tice. Ghana’s quality infrastructure thus ensures that food
nationally-recognized institutions, which in low-income safety standards are respected at all stages of the value
countries are often resource-constrained or, in some chain—at a lower cost for producers than was previously
instances, absent. Reliance on service-providers in buyer the case. This constitutes evidence that there is an impor-
or third countries can be a costly and time-consuming tant role to play for governments and international partners
process. Lack of access to local technical expertise can in facilitating compliance with standards thus enhancing
therefore limit the achievement of a comprehensive qual- both food security and economic competitiveness.
ity management system, with negative consequences on
ote
N
firms and consumers alike. 1. Food standards are traditionally set and enforced by national authorities, following the guide-
Against this backdrop, UNIDO has developed a com- lines of international standard-setting bodies. Recent years, however, have witnessed a rise
of private and voluntary standards introduced by multinational corporations, civil society
prehensive programme to help developing economies to organizations, as well as non-profit organizations. Schematically, public and private stan-
overcome the shortcomings of their quality infrastruc- dards differ in that lack of compliance with the former may be addressed through criminal
or administrative courts, whereas private standards are enforced through certification bod-
ture. Services range from establishing standardization ies instead. Still, non-compliance with private standards can lead global retailers to refuse
and certification bodies to capacity building in industrial contracting with suppliers that are unable to obtain the necessary certifications. Thus private
standards, while by definition voluntary, may in fact become mandatory (UNIDO 2015c).
Providing access to quality-assured medicines profound implications regarding the effectiveness of

In many low- and middle-income countries, millions of treatment, the occurrence of cross contamination that
people lack access to essential medicines. Public health can lead to severe adverse events, as well as the emer-
facilities may provide generic medicines for free or at a gence of resistance against certain drugs. Yet accord-
very low cost, but their availability appears to be low ing to estimates by the World Health Organization
(Kaplan and Mathers 2011). Where social health insur- (WHO), up to 25 percent of medicines consumed in
ance schemes exist at all in low-income countries, their developing countries are sub-standard (WHO 2003b).
coverage of medicine is limited (Cameron et al. 2012). The rate of sub-standard products can exceed 60 per-
As a result, consumers have to pay out of pocket at pri- cent for certain life-saving drugs, such as anti-malarial
vate facilities, where prices are high, forcing many to medicines, in certain countries (WHO 2011).
forgo treatment or be pushed under the poverty line.16 Inadequate adherence to international standards
Improving access to medicines is not just about price by pharmaceutical manufacturers and weak qual-
and availability; critically it also requires that medi- ity control systems at the national level are critical
cines are of high quality. The quality of the product has factors in explaining the prevalence of sub-standard
39
“ The development of home
appliances like washing machines
and vacuum cleaners sharply
reduced the time women needed to
spend on household production
1 and counterfeit products on developing country mar-

kets, with dire effects on the welfare of consumers
women, as opposed to men, should perform has impor-
tant implications for employment and earning oppor-
(Box 1.4). It is worth noting that low quality equally tunities (Duflo 2012). The fact that women are gen-
affects locally manufactured medicines and imports erally expected to take on the bulk of housework and
(Bate 2010). This is a particularly worrisome pattern home-caring responsibilities leads to lower discretion-
in lower-income countries where imported medicines ary time that can be allocated to paid work. Lack of
satisfy a large part of domestic consumption. access to paid employment can reinforce women’s
Improving domestic capabilities to produce gener- dependence on male relatives and constrain oppor-
ics in countries with established pharmaceutical tunities to access the public domain and make their
industries may help increase equitable access to essen- voices heard in the political sphere (Kabeer 1999).
tial medicines (Banda et al. 2016).17 Provided that Partial automation of home-based tasks allows
pharmaceutical firms adhere to the WHO’s Good households to allocate fewer resources to household
Manufacturing Practices (GMP), increasing local production. The discretionary time released can be
production could help provide good- quality generics spent on other, market-oriented activities (Becker
at affordable prices (UNIDO 2012). Whether local 1965, Woersdorfer 2017).18
production would be beneficial to consumers remains In industrialized economies electrification, the
in doubt, however, with critics arguing that local pro- expansion of access to running water and the develop-
duction in countries with limited infrastructure and ment of home appliances like washing machines and
human capital is likely to entail higher prices and vacuum cleaners sharply reduced the time women
therefore hamper access (Kaplan 2011). needed to spend on household production (Gordon
Data on GMP-compliant manufacture of essential 2016), allowing them to engage in paid work out-
medicines in low- and middle-income countries are side the home. The impact of time-saving innovation
scarce. Estimates suggest that despite the cost disad- was not felt immediately, however. Over the short to
vantage local producers may face against established medium term, it seems to have resulted in a different
manufacturers, domestic production of generics can composition of household work rather than a shift to
be viable, even with relatively small domestic markets market work. Over time, improvements in household
(Chaudhuri and West 2015). Regional initiatives, technology appear to have greatly reduced the gender
innovative public procurement policies and regulatory gap in employment in industrialized economies.
reforms can go a long way in supporting local produc- Estimates of the impact of affordable household
tion of generics (see Box 6.4 in Chapter 6). technology in the United States, for instance, sug-
gest that technological progress in household goods
Affordable variety, time use and gender equality may account for over half the observed rise in female
Gender disparities in access to resources and opportu- labour-force participation in the country between
nities persist in all country income groups and regions. 1900 and 1980 (Greenwood et al. 2005, see also
Indeed, as recognized by the international community de V. Cavalcanti and Tavares 2008). Data on develop-
with the adoption of SDG 5, the lack of gender equal- ing and emerging industrial economies are scarcer, yet
ity in education, health outcomes, earning opportu- one recent study of the impact of rural electrification
nities and political participation is a major barrier to in South Africa finds that improved access to elec-
human and economic development (Sen 1990, World tricity might have led to an increase in 9.5 percentage
Bank 2012a). Affordable variety can help reduce gen- points in female employment (Dinkelman 2011).
der disparities. With regards to the impact of modern household
Gender inequality takes many forms. The persis- appliances on the gendered distribution of unpaid
tence of gendered norms about what type of activities housework within the household, however, evidence
40
“ UNIDO helps countries
developing a commercially viable
pharmaceutical sector that adopts
manufacturing practices of
internationally acceptable quality
Box 1.4
Enforcing quality standards in medicines 1
Consumer demand for quality-assured medicines is grow- UNIDO’s approach is the GMP Roadmap, consisting of a
ing in many developing and emerging economies. While risk-based, phased approach to support pharmaceutical

commercially viable pharmaceutical industries in several companies in their transition towards full compliance with
low- and middle-income countries could, in principle, tap infrastructure requirements and quality management sys-
into the domestic market, the quality of their products is tems. The approach seeks to harmonize the urgent need
often not in line with internationally acceptable GMPs, for improving existing manufacturing standards with the
such as those laid out by WHO. Inadequate adherence to, recognition that the transition to full GMP compliance is
and enforcement of, standards for imported and locally time-consuming. So, the early focus is on addressing the
produced drugs is therefore a major reason for the preva- least compliant, high-risk areas first—with subsequent
lence of sub-standard medicines on developing country phases having clearly defined milestones and targets
markets. (UNIDO 2015d).
Achieving international GMPs for finished formula- A risk-based, stepwise approach results in a viable
tions, however, can be a daunting prospect given it cov- and scientifically sound pathway towards full GMP com-
ers all aspects of the production process from sourcing of pliance. The benefits are multiple. Adopting a transition
raw materials all the way through production and quality process characterized by clearly defined requirements,
assurance to final release of the product. Achieving GMP activities and milestones ensures a level playing field
requires investment in infrastructure and developing com- throughout the various phases of implementation. Sup-
prehensive quality management systems and documen- porting companies to develop corrective action plans ena-
tation throughout the production process. Thus a lack of bles risk mitigation while upgrading takes place. Moreover
access to affordable capital and the technical expertise the stepwise process increases the willingness of actors
to implement upgrading programmes can limit the abil- within the industry to implement GMP. It also increases
ity of manufacturers to strive for international standards. transparency during licensing procedures and regulatory
Evidence suggests that low-cost generics imported from inspections, thereby helping to strengthen national regula-
emerging industrial economies tend to lack sufficient tory authorities (UNIDO 2015d).
quality credentials (see, for instance, Bate 2010). So, the Over the medium to long run, implementation of the
solution to the problem is not to resort to imports; if any- Roadmap will result in a significant reduction of sub-
thing, this further compounds the issue. standard products on the market. Initially developed for
Resource constrained regulators face a huge chal- Kenya in consultation with industry stakeholders (UNIDO
lenge to oversee the quality of products produced from 2014a), the approach has been generalized and read-
numerous plants (often in the thousands) across different ied for tailoring to individual country contexts. It is, for
geographies around the globe. WHO estimates that only instance, a key constituent of the package of solutions
about 20 percent of its 190 member states have well- put forward by the Pharmaceutical Manufacturing Plan
developed medicine regulation in place (WHO 2003a). for Africa (PMPA) Business Plan—a partnership between
Supporting the industry in close proximity to the market UNIDO and the African Union Commission. UNIDO is cur-
to reach international standards would provide National rently working with the West African Health Organization
Medicines Regulatory Authorities (NMRAs) with a source (WAHO) to a framework for the Economic Community of
of supply that they can more realistically provide proper West African States (ECOWAS) region, based on the GMP
oversight to. While the WHO prequalification scheme pro- Roadmap methodology that will provide a consistent
vides quality assurance for products supplied using large basis for upgrading the industry and monitoring its pro-
international donor financed procurement funds, it only gress across the member states. This is a cornerstone of
covers specific classes of essential medicines.1 Oversight WAHO’s ECOWAS Regional Pharmaceutical Plan.
on all other products used on a daily basis by consumers
ote
N
depends on the NMRAs. 1. The programme consists of an assessment process that, in conjunction with other procure-
Against this backdrop, UNIDO helps countries devise ment criteria, is used by UN and other agencies to make purchasing decisions on medicines
to safeguard consumers. The Prequalification Programme covers more than 350 finished
strategies for developing a commercially viable pharma- pharmaceutical products and more than 20 active pharmaceutical ingredients. The pro-
ceutical sector that adopts manufacturing practices of gramme initially focused on quality-assured low-cost generic versions of medicines to treat
HIV, tuberculosis and malaria. But it has evolved over the years to include other essential
internationally acceptable quality. A key component of medicines for reproductive health, diarrhoea and neglected tropical diseases.
41
“ Through the lenses of
consumption, manufacturing
emerges as the key sector
of the global economy
1 can be ambiguous. Some researchers find, rather sur-

prisingly, no reduction in women’s unpaid housework
key sector of the global economy, because it is a major
provider of new varieties and qualities of goods that,
from greater availability of household appliances in over time, became cheaper and affordable for every-
some industrialized economies (Bittman et al. 2004, body. As discussed in the chapter, the provision of new
Offer 2006).19 Others point out that such devices are varieties and qualities of goods, which are affordable
hardly relevant to poor women from developing coun- for all, raises living standards and improves welfare
tries that live in areas lacking water and electricity of consumers. Moreover, it plays a prime role in the
(Mitter 2004). achievement of several SDGs, including poverty alle-
By increasing the discretionary time at the disposal viation, food security, access to medicines and gender
of women and men, the provision of affordable variety equality.
therefore can, under the right circumstances, help to The chapter also stressed the important interac-
achieve the objective of reducing the burden of unpaid tions that exist between demand and supply. Due
domestic work and care, directly contributing to SDG to these interactions, the consumption of manufac-
5 (particularly targets 5.4 and 5.5).20 However, by itself, tures is a prime driver of industrial development and
greater access to time- and labour-saving technologies income creation, as represented in the virtuous circle
does not necessarily alter the gendered division of unpaid of manufacturing consumption. The next chapter
household work within the household. Complementary examines and describes in further detail the different
strategies, such as the increased provision of care services, mechanisms in play along the virtuous circle of manu-
need to be in place to improve labour market outcomes. facturing consumption, as well as the main challenges
The above discussion indicates that through the and opportunities that this circle can bring to coun-
lenses of consumption, manufacturing emerges as the tries at different stages of development.
Notes
1. According to Prahalad (2006), who coined the Input-Output Database (www.wiod.org). This
term, the bottom of the pyramid includes people chapter draws on the information provided by the
living on less than $2 a day. Eora Multiregional Input-Output database and
2. Chapter 7 presents all trends analysed in this sec- the OECD Inter-Country Input-Output Tables,
tion, distinguishing between countries at differ- which have the broadest coverage in terms of
ent levels of industrial development. countries.
3. When looking at real values, the relative size of 5. See www.worldbank.org/en/programs/icp.
manufacturing depends heavily on the base year 6. Chapter 2 provides details on this dataset. One of
used to fix prices. Here, the common practice of its major advantages is that it disaggregates data
basing prices on a recent year (2010 in Figure 1.5) by income segments within countries.
is followed, so that they reflect today’s reality. 7. Whereas international input-output tables are
4. These initiatives include the Eora Multiregional based on national accounts statistics, the World
Input-Output database (www.worldmrio.com), Bank International Comparison Program data-
the Global Trade Analysis Project Database base is based on household expenditure surveys.
(www.gtap.agecon.purdue.edu), the IDE-JETRO That explains the large difference between the first
Asian Input-Output Tables (www.ide.go.jp), two bars of the figure and the last one. National
the Inter-Country Input-Output Tables (http:// accounts–based statistics impute the “consump-
oe.cd/icio) by the Organisation for Economic tion” of household services. Expenditure surveys
Co-operation and Development and the World do not, possibly increasing the importance of
42
manufacturing goods. The sectoral disaggrega-
tion used in both sources is typically different, as
consumption, thanks to industrialization and
rising agricultural productivity. Over the short
1
national accounts use industry-based classification term, other factors affect food prices. The recent
whereas household surveys use consumption-spe- boom in commodity prices, for instance, seems

cific classifications. The definition of manufactur- to have driven up the relative prices of foodstuffs.
ing in household surveys is not straightforward. Climate change also affects food prices over the
In national accounts, for example, food items are short to medium term (see FAO 2016).
defined as agricultural or manufactured goods 16. The median ratio between local prices and inter-
depending on whether they were processed. This national reference prices (the lowest prices at
distinction cannot be made in data from house- which medicines are bought and sold interna-
hold surveys, and all food items need to be clas- tionally) for the same basket of generic medicines
sified as manufactured goods, possibly increas- ranges from 6.7 for Sub-Saharan African coun-
ing the importance of manufacturing. For these tries to 9.5 for countries in Latin America and the
reasons, inclusion of both sources in Figure 1.6 is Caribbean (Kaplan and Mathers 2011).
only illustrative, intended to show that the impor- 17. In 2014 the heads of the Joint United Nations
tance of manufacturing increases when the focus Programme on HIV and AIDS (UNAIDS),
is on final private consumption. UNIDO and the WHO jointly advocated
8. For details on the United Nations Agenda 2030, increasing local production of medicines in Sub-
see https://sustainabledevelopment.un.org/ Saharan Africa and called for harmonizing indus-
post2015/transformingourworld. trial and public health policies (see Sidibé et al.
9. This section draws on de Macedo et al. (2017). 2014).
10. Superior goods are characterized by an income 18. The treatment in this section is not exhaustive.
elasticity that is greater than unity. See Chapter 2. Industrial development can reduce (or, in some
11. This section draws on de Macedo et al. (2017). instances, increase) gender disparities through
12. See Dowding (2009) and Gasper (2007) for com- several other mechanisms. For a comprehensive
prehensive reviews of welfare in economics and discussion of the relationship between indus-
moral philosophy. trialization and gender equality, see Fontana
13. The treatment in this section is not exhaus- (Forthcoming). For a discussion of the impact of
tive. Industrial development can reduce poverty industrial development on patterns of employ-
through several other mechanisms. For a comment by gender—the “feminization” of the labour
prehensive discussion of the relationship between market in emerging industrial economies in the
industrialization and poverty alleviation see context of the increasing fragmentation of pro-
Lavopa and Szirmai (2012) and UNIDO (2015b). duction—see Standing (1989) and Kucera and
14. Dietary transitions need not result in positive Tejani (2014).
health outcomes. Greater varieties of food may 19. Studying the impact of appliances ownership on
be high in sugar, fats and oils, leading to increases time use in Australia, Bittman et al. (2004) find
in obesity and other chronic diseases (Webb and that women in households that own domestic
Block 2012). The introduction of public health appliances do not seem to allocate fewer units
interventions such as behavioural incentives of time to housework compared with women in
(“nudges”) can contribute to shaping consump- households that do not own appliances. Therefore
tion and dietary patterns. despite progress, disparities persist in the alloca-
15. Over the long run, food prices appear to tion of unpaid household work between women
have decreased relative to the price of overall and men in industrialized economies.
43
1 20. “Recognize and value unpaid care and domestic
work through the provision of public services,
appropriate” (target 5.4); and “Ensure women’s
full and effective participation and equal oppor-
infrastructure and social protection policies and tunities for leadership at all levels of decision-
the promotion of shared responsibility within making in political, economic and public life”
the household and the family as nationally (target 5.5).
44
Chapter 2
The virtuous circle of

Interactions between consumer income threshold, but a product with high utility rela-
demand and industrial development tive to price (such as a mobile phone) could diffuse very
For a new manufactured good to be introduced to quickly, regardless of a country’s income level.
the market, demand is needed. A high initial price On the supply side, as domestic firms manufactur-
and few applications render a good accessible only to ing new products accumulate production experience, the
high-income households. As the sector consolidates initial high production costs usually go down gradually.
and gains scale, prices fall, making the good afford- Greater economies of scale from the expansion of the
able to more consumers. With enough demand in domestic market and of export opportunities, improve-
place, the good becomes mass consumed—“massified” ments in production-related infrastructure, and govern-
—a llowing for further exploitation of scale econo- ment policy incentives can all contribute to the take-off
mies, the entry of new firms, greater competition and of the new industry and massification of new products.
further declines in prices. This interactive process Increasing quality and cost competitiveness can further
between demand and supply enables the diffusion expand domestic production and make the products
of new, better and ever cheaper goods for consum- affordable for more households. This further stimulates
ers alongside the expansion and development of new higher production volume, productivity increases and
industrial sectors and related providers. price reductions, and such success will induce firms to
This interactive process has been illustrated as a increase product variety so as to meet the varying needs
virtuous circle of manufacturing consumption in the of customers and capture new markets.
previous chapter (see Figure 1.8). This chapter exam- This process of diversification, massification and
ines in detail the core mechanisms acting in this circle price decline can create two key outcomes, leading
and the conditions for it work well. once more to a shift in consumption patterns and the
On the demand side, increases in income alter con- continuation of the circle. One is employment and
sumption patterns, shifting household demand from increased income for those now employed in new (and
food towards manufactured goods and services, and related) industries. The benefits for a national econ-
creating demand for new manufactured products in a omy from the new industries will also come from the
country. Increased demand for new products to a suffi- consumption multiplier through spending the income
cient level of scale gives an impetus to the start of their generated by the new industries (and related activities).
domestic production. How fast a new product diffuses The other outcome is a surge in the consumer surplus
in a country depends on country- and product-specific owing to increased affordability of the new product
factors. As a country’s income level is one of the key stemming from the expansion and higher productivity
factors, countries with higher economic growth tend of the new industries. The consumer surplus increases
to experience faster diffusion. However, even countries disposable income and leads households to start buy-
at a similar income level might differ in their diffu- ing goods that they could not afford before.
sion of the same product owing to differences in the Global conditions important for the circle to start
distribution of income, because countries with high and then keep turning include economic stability and
income inequality might have fewer households at an growth, supportive trade and technology-transfer
income needed to buy the product. Product-specific regimes (for developing countries), and future global
factors can also break the relationship between income demand for manufactured products—as well as, in the
and product diffusion. Normally, diffusion of a prod- long term, environmental sustainability. Country con-
uct increases as income rises, at least until a certain ditions include the distribution of income, domestic
45
“ Increases in income alter
consumption patterns, shifting
household demand from food
towards manufactured goods
2 production capabilities for meeting growing demand

and raising productivity, and comparative advantages
in 1985 prices, average gross domestic product (GDP)
per capita during this period was $13,012 in the
in certain industries. United States and $1,469 in Sri Lanka.
The traditional approach to investigating how
The virtuous circle of manufacturing consumption
Diversification of demand and the income influences household expenditure is through

emergence of new industrial sectors the study of Engel curves, which describe how house-
hold expenditure on a good or service varies with house-
Relationship between income and hold income. This chapter also stresses the importance
consumption patterns of identifying satiation levels. A key conjecture of many
Food accounts for 56–78 percent of the budgets of the models of consumer behaviour and demand-driven
world’s poorest people (Banerjee and Duflo 2007).1 structural change is that household expenditure on
As incomes rise, the share of household spending allo- a good has an upper limit, called the satiation level;
cated to food declines—a pattern known as Engel’s once it is reached, household expenditure ceases to
Law (Engel 1895). According to Banerjee and Duflo rise in response to increasing income (Pasinetti 1981).
(2007), a 1 percent increase in overall expenditure Satiation potentially plays a crucial role in driving struc-
is associated with about a 0.7 percent increase in the tural change from the demand side, as it may imply that
average share of spending on food by a poor family. increases in demand in a sector eventually slow, as more
Evidence for Engel’s law is found in poor and rich households reach the level of income at which satiation
countries alike (Figure 2.1). Between 1968 and 1981, occurs. Resources would then shift away from industries
the share of food in the average budget was about supplying goods for which demand has satiated towards
18 percent in the United States and 64 percent in Sri industries that produce goods for which demand has
Lanka (Clements and Chen 1996). In international $ not yet been satiated.
Figure 2.1
The share of household spending on food declines as income rises
100
Share of food and non-alcoholic beverages in household spending (percent)
75
50
25
0
0 10,000 20,000 30,000 40,000 50,000 60,000
Note: All values are for 2011. Household expenditures are in current $. GDP is gross domestic product and PPP is purchasing power. Classification of food and non-alcoholic beverages is based on Annex C4,
Table C4.1.
Source: UNIDO elaboration based on the 2011 International Comparison Program dataset (World Bank 2015) and World Development Indicators (World Bank 2017b).
46
“ The examination of Engel
curves provides interesting
insights into the process by which
demand diversifies away from
some products towards others
The examination of Engel curves for different

types of goods provides interesting insights into the Figure 2.2
2
Income segments in the Global Consumption
process by which demand diversifies away from some Database
products towards others. This, however, requires spe-

Higher
cific data on consumption expenditures by households (10 percent)
at different levels of income around the world. PPP$8,406
Middle
Data description (15 percent)
The data used for the analysis in this chapter are from
PPP$3,081
the World Bank’s Global Consumption Database,
which is based on the World Bank’s national house- Low
(25 percent)
hold consumption or expenditure survey datasets. All
the data presented are from 2010. They cover 91 coun- PPP$1,085
tries, including emerging industrial economies and
Lowest
industrialized economies (22 percent), other develop- (50 percent)
ing economies (42 percent) and least developed coun-
tries (36 percent). The data cover 106 consumption
Source: UNIDO elaboration based on the Global Consumption Database (World Bank 2014).
categories, including 32 food-related products, 35
types of services and 44 types of non-food manufac-
tured goods.
The Global Consumption Database examines four Figure 2.3
Large differences in the distribution of the
income segments for each country (lowest, low, mid- population across income segments and
dle and higher), proxied by total consumption expend- development stages
iture (Figure 2.2). These segments are based on global 100

Percent of country’s population (median percent)
income distribution data. The lowest income segment Lowest income

Low income
corresponds to the bottom half of the global distribu- Middle income
Higher income
tion; the low income segment to the 51st–75th percen- 75
tiles; the middle consumption segment to the 76th–
90th percentiles; and the higher income segment to
the 91st percentile and above.
50
The income distribution of the population var-
ies widely by country. A household that is rich at the
country level could belong to the lowest global seg-
25
ment. Figure 2.3 shows the distribution of the popu-
lation across global income segments in LDCs, other
developing economies and emerging industrial and
0
industrialized economies. In least developed countries Least Other Emerging industrial
developed developing and industrialized
80 percent of the population belongs to the lowest countries economies economies
global income segment, and less than 0.01 percent of Note: All values are for 2010 and in constant 2010 PPP$ (PPP is purchasing power parity).
the population falls into the higher income segment. Industrialization level and income classifications are based on Annex A1, Table A1.1.
Source: UNIDO elaboration based on dataset by Moneta and Stepanova (2017) derived from the
In emerging industrial economies and industrialized Global Consumption Database (World Bank 2014).
economies,2 5 percent of the population belongs to the

higher income segment.
47
“ The response of different
manufactured goods to changes
in income depends on consumers’
location and socioeconomic
status; it also changes over time
2 Table A1.1 in Annex A1 classifies countries based

on the top 5 percent of population: If the top 5 per-
to a 1 percentage point increase in income (Figure
2.5). From all consumption items covered in the
cent belongs to the lowest-income segment of the Global Consumption Database, the analysis of this
Global Consumption Database income categories section focuses on 15 manufactured goods that can
(i.e., yearly income below PPP$1,085 [PPP is purchas- be mapped one-to-one to manufacturing sectors in
ing power parity]), the country belongs to the lowest- the International Standard Industrial Classification
income group. If the top 5 percent belongs to the low- (ISIC).3 Within these goods, pharmaceutical products
income segment, the country is included in the global are at the bottom of the list (demand is highly inelas-
low-income group, and so on. This classification allows tic), automobiles at the top (demand is highly elastic).
average consumption elasticities to be estimated for Products can be grouped using the following
each group. standard classification: inferior goods (elasticity less
than 0), necessities (elasticity of 0–1) and superior
Engel curves for food, manufacturing and goods (elasticity greater than 1). Pharmaceutical prod-
services ucts, clothing and footwear are necessities in most
Figure 2.4 plots Engel curves for manufacturing, countries. Cars, motorcycles and petrol (gasoline) are
services and food for countries in the global higher superior goods.
income group (last column in Table A1.1 in Annex Comparing average elasticities in different income
A1). In this segment, most expenditure goes towards segments reveals how a product may be a luxury good
services, followed by manufactured goods and food. In for people in the lowest income segment and a neces-
the middle income segment, between the second and sity for people in the higher income segment (Figure
third dots in Figure 2.4, expenditure on food still rep- 2.6). This pattern is clearest in the least developed
resents a large share of households’ budgets; in many countries and other developing economies; it is less
countries, it accounts for a larger share of expenditure obvious in the emerging industrial and industrialized
than manufactured products. Services appear to dis- economies, where both clothing and household tex-
play the highest income elasticity (as suggested by the tiles keep a similar level of elasticity across all income
steep slope of the Engel curves), followed by manufac- segments. This might be reflecting quality improve-
turing and food. ments and increases in the varieties of products cater-
ing to diverse preferences of customers that could
Income elasticities by type of good raise the income elasticities of demand even for such
The response of different manufactured goods to products once considered necessities, like clothes and
changes in income depends on consumers’ location household textiles.
and socioeconomic status; it also changes over time, Declines in the median income elasticity when
reflecting different stages of the life cycle of manu- comparing lower-income segments with higher-income
factures. Within a country, the same product can be segments is also evident across many other manufactur-
a luxury for the lowest-income segment and a neces- ing products, as seen in Annex A2, Figure A2.1. This
sity for the highest-income segment. Over time, indicates that demand for manufacturing products
goods introduced at high prices and accessible only may slow once people have enough income to enjoy the
by high-income households can become necessities, basic functional utilities of manufacturing products.
as innovations reduce their prices and broaden their
applications. Satiation
The patterns of consumption can be illustrated Demand for a product is affected by the tendency for
by the income elasticities of demand—the percentage consumers to become satiated. This tendency is a long-
increase in the consumption of a product in response term driver in the virtuous circle shown in Figure 1.8
48
“ Demand for a product is
affected by the tendency for
consumers to become satiated
Figure 2.4
High income households in general spend less on food than other products 2
Belarus Bosnia and Herzegovina Brazil
17,000
Expense on a product (constant 2010 PPP$, log scale)

5,000
1,100
250
55
0
400 1,100 5,000 15,000 400 1,100 5,000 15,000 400 1,100 5,000 15,000
Bulgaria Colombia Latvia

17,000
5,000
1,100
250
55
0
400 1,100 5,000 15,000 400 1,100 5,000 15,000 400 1,100 5,000 15,000
Lithuania The f. Yugosl. Rep. of Macedonia Montenegro

17,000
5,000
1,100
250
55
0
400 1,100 5,000 15,000 400 1,100 5,000 15,000 400 1,100 5,000 15,000
Russian Federation Serbia South Africa

17,000
5,000
1,100
250
55
0
400 1,100 5,000 15,000 400 1,100 5,000 15,000 400 1,100 5,000 15,000
Total annual expenditure (constant 2010 PPP$, log scale)

Food Manufacturinga Services
a . Excludes food and non-alcoholic beverages; alcoholic beverages, tobacco and narcotics and other personal effects.
Note: All values are for 2010 and in constant 2010 PPP$ (PPP is purchasing power parity). Aggregate Engel curves of manufacturing, services and food for countries belonging to global higher-income
group (see Annex A1, Table A1.1). Manufacturing consumption goods classification is based on Annex C4, Table C4.1.
Source: UNIDO elaboration based on dataset by Moneta and Stepanova (2017) derived from the Global Consumption Database (World Bank 2014).
49
“ Demand for food is easily
satiated; demand for manufacturing
products and services is not
2 Figure 2.5
Consumer durables and luxury goods have high income elasticities of demand
a. Elasticity greater than 1 b. Elasticity less than 1

3 3
Mean elasticity
Mean elasticity
2 2
1 1
0 0
rs
me nal
gs
nt
ry
rie f
cts
les
r
en
so o
ea
cle
he
ce
ng
tile
ca
ne
me
hin
es les
yc
nt
du
uip so
ipm
tw
an
atc
eri
cy
tex
tio
tor
Bic
uip
eq er
cc rtic
nis
pro
foo
pli
ov
dw
sta
tor
qu
rt r p
Mo
ld
eq
p
fur
rc
ga ra
er
o
als
de
a
Mo
po fo
an
nd
eh
oo
hin he
fax
oth
old
nd
tic
ns ts
an
sa
us
s
r fl
lot , ot
ea
ele
tra rican
eh
ck
eu
nd
Ho
es
ok
the
d c ial
clo
us
ac
dt
tur
sa
nc
bo
an ter
ho
do
ub
arm
an
rni
y,
lia
oe
rs,
a
dl
ic
an
Fu
lle
pp
ng m
ne
Sh
Ph
pe
ctr
an
we
ca
ho
thi ng
ts
pa
ele
rpe
els
Je
lep
clo lothi
uti
ws
Fu
all
Ca
pe
Te
Ne
C
Sm
era
Th
Note: All values are for 2010 and in constant 2010 PPP$ (PPP is purchasing power parity). A product is classified as a necessity if the elasticity is between 0 and 1. Manufacturing consumption goods
classification is based on Annex C4, Table C4.1.
in Chapter 1 and in the transformation of a country’s Box 2.1

Calculating the satiation rate
economic structure. Box 2.1 explains how the satia-
tion rate is calculated. The satiation rate is calculated as a ratio of the
Demand for food is easily satiated; demand for slopes of Engel curves at two income levels (see
manufacturing products and services is not (Figure Figure 2.4). For the higher-income group, the ratio
2.7). This tendency is generally true for households is based on the slopes of the high- and middle-
income segments (between the fourth and third dots
in the middle and higher global income groups. For
from the left on the Engel curve in Figure 2.4). For
households at low income levels, consumption of the middle-income group, the ratio is based on the
manufactured goods and services increases at a slower slopes of the middle- and low-income segments
rate than income (see Annex A2, Figure A2.2). Until (between the third and second dots from the left).
For the low-income group, the ratio is based on the
income reaches about $2,000 a year, consumption of
slopes of the low and lowest segments (between the
manufactured goods is limited. second and first dots from the left). A satiation rate
of less than one suggests that demand for a product
Creating variety is satiated.
An increase in income as a result of the growth of
existing industries and the consumption multiplier
effects will not, per se, lead households to proportion- and the income elasticity of demand. Average income
ally expand their consumption of goods and services. elasticity of demand for motor vehicles can be high,
The effect depends on the level of household income, for example, but it is likely to be close to zero for the
50
“ Under the right conditions,
changes in consumption
patterns create new demands
and provide incentives to start
new manufacturing activities
Figure 2.6
Lowest income households spend more on household textiles and telephone equipment as income rises 2
Least developed countries Other developing economies
2.0 2.0
Elasticity (median elasticity)

1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
Clothing material, Household Telephone and Clothing material, Household Telephone and
other articles of clothing textiles telefax equipment other articles of clothing textiles telefax equipment
and clothing accessories and clothing accessories
Emerging industrial and industrialized economies

Lowest income 2.0
Low income
Middle income
Higher income
1.5
1.0
0.5
0.0
Clothing material, Household Telephone and
other articles of clothing textiles telefax equipment
and clothing accessories
Note: The figure considers the consumption of selected manufacturing goods across income groups within each of the three development groups: emerging industrial and industrialized economies,
other developing economies and least developed countries. The threshold is the same as in Figure 2.2. All values are for 2010 and in constant 2010 PPP$ (PPP is purchasing power parity). A product is
classified as a necessity if the elasticity is between 0 and 1. Industrialization level and manufacturing consumption goods classifications are based on, respectively, Annex C1, Table C1.2 and Annex C4,
Table C4.1.
majority of people in low-income countries, because incentives to start new manufacturing activities
incomes are well below the minimum threshold for through investment and innovation. The emergence of
purchasing a motor vehicle. new industries and markets has two important effects
Under the right conditions, changes in con- on consumers. First, new industries generate addi-
sumption patterns create new demands and provide tional income and employment opportunities, which
51
“ The variety of goods
consumed tend to increase
with economic development
2 Figure 2.7
Food products satiate but manufacturing
each country grouping. The least developed world on
average consumes 94 percent of available food catego-
products and services do not
ries, 76 percent of available manufacturing categories
1.5
Satiation rate (median of R)
compared to the 97 percent of food categories and

83 percent of manufacturing categories consumed by

the emerging and industrialized countries.
For the creation and diffusion of new varieties of
1.0
goods, it is important to look not only at new goods
but also at improvements in existing goods. The litera-
ture characterizes new or increased variety along two
broad dimensions: unrelated and related.4
0.5 “Unrelated” refers to goods of an intrinsically dif-
ferent nature.5 A washing machine and a refrigera-
tor, for example, are unrelated. As they satisfy differ-
ent needs, they can diffuse simultaneously as income
0.0 increases.
“Related” refers to versions of the same product
a . Excludes food and non-alcoholic beverages; alcoholic beverages, tobacco and narcotics and
other personal effects. that are differentiated by quality, design or other prod-
Note: All values are for 2010. R is the satiation rate. There is a tendency of satiation below the
dotted line at R = 1. Manufacturing consumption goods classification is based on Annex C4,
uct characteristics. Products and services in a sector
Table C4.1.
Global Consumption Database (World Bank 2014). Figure 2.8
Consumption bundles expand as countries
develop
100
Percent of consumed consumption categories (mean percent)
may trigger changes in the composition of household

spending. Second, new industries can improve liv-
ing standards, by making new varieties available and
75
realizing economies of scale that enable the prices for
those new varieties to fall and be consumed by a larger
share of the population.
As wealth grows, households tend to alter their 50
spending patterns. This phenomenon is viewed as a

welfare-enhancing feature of modern economic devel-
opment (Barro and Sala-i-Martin 1995, Grossman and 25
Helpman 1991, Romer 1990). The most direct assess-

ments of these benefits are found in the estimated
gains in consumer surplus from increased variety (see 0
Chapter 1). Least developed Other developing Emerging industrial
countries economies and industrialized economies
Empirical evidence confirms this trend: Average
a . Excludes food and non-alcoholic beverages; alcoholic beverages, tobacco and narcotics and
consumption bundles are larger in countries with other personal effects
higher GDP, indicating that the variety of goods con- Note: All values are for 2010 and in constant 2010 PPP$ (PPP is purchasing power parity).
Industrialization level and manufacturing consumption goods classifications are based on,
sumed tend to increase with economic development. respectively, Annex C1, Table C1.2 and Annex C4, Table C4.1.
Figure 2.8 shows the percentage of the 106 products Global Consumption Database (World Bank 2014).
in the Global Consumption Database consumed by

52
“ When luxuries turn into
necessities that the vast majority
of households can afford,
they are said to ‘massify’
are more closely related to each other than to products

and services in other sectors (Saviotti and Frenken
across products, as shown in Figure 2.10, a cross-sec-
tional estimate based on 2016 data on 86 countries.
2
2008). An increase in unrelated variety occurs inter- Household ownership of refrigerators and vacuum
sectorally; an increase in related variety occurs intra- cleaners, for example, reaches almost 100 percent

sectorally. An upgrade in the quality of a good that once national income rises to $20,000–$25,000 per
does not replace the previous version of the good can capita (in 2005 PPP$). Car ownership never reaches
also be regarded as an increase in the related variety of 100 percent, because cars are much more expensive
the economy. than household appliances and may not be necessary
In some cases, a higher-quality or differentiated in places with good public transit.
version of an old good completely replaces the old one Both country-specific factors (including the
(as in the case of colour televisions in high-income growth rate of the economy, the distribution of
countries). In other cases, the differentiated versions income, and geographical and demographic condi-
of the good coexist, targeting different segments of the tions) and product-specific characteristics affect the
market. Demand for compact cars may become sati- speed of diffusion. China and Viet Nam (high-growth
ated at relatively low levels of GDP per capita, whereas countries), for example, have steeper slopes (faster
the satiation point for luxury cars takes place at only diffusion) for many manufactured products than
extremely high incomes (The Economist Intelligence Cameroon and Kenya. Across the six countries in
Unit 2016). As income rises, moving towards the pro- Figure 2.11, mobile phones and colour television sets
duction of higher-quality segments may be the only diffuse faster than vacuum cleaners and cars.
way to sustain high growth in the demand for specific Changes in demand patterns as countries
goods. develop and the massification of consumption are
closely linked to the emergence and consolidation
Massification of demand and the of domestic manufacturing industries. Low-income
consolidation of industrial sectors countries, for instance, normally develop the food
When luxuries turn into necessities that the vast and beverage, wearing apparel and textile indus-
majority of households can afford, they are said to tries, all of which produce necessities (Figure 2.12).
“massify.” A salient feature of successful manufac- These industries are also labour intensive and may
tures is their broad-based diffusion across house- create formal sector jobs. Increasing demand in
holds. The diffusion of most goods follows an these industries can have a profound impact on the
S-shaped pattern (see Rogers 2003). At first, only a incomes of workers employed in labour-intensive
few individuals adopt the new good; soon more and manufacturing industries and became an important
more individuals adopt it. Later the rate of adoption avenue to initiate the virtuous circle of manufactur-
begins to level off, as fewer and fewer individuals ing consumption.
remain who have not yet adopted. Eventually, the In the medium to long term, the income elastic-
S-shaped curve reaches its asymptote. The good has ity of demand for necessities declines. However, the
become a mass product. level of consumption continues to increase, albeit at
This pattern is evident for a range of goods across a slower pace. Within a broad category of necessi-
different development groups (Figure 2.9). Adoption ties like food, products like organic foods are likely
of new consumer goods appears to have accelerated to maintain or even increase their income elasticity.
around 2005. Increases in variety and convenience (e.g. frozen food)
Although the diffusion of many manufactured can help sustain the growth of the food and bever-
products follows an S-shaped pattern, the speed age sector, as indicated by the continuous increase in
and maximum potential level of diffusion differs Figure 2.12.
53
“ Higher labour productivity in
manufacturing reflects capital
investment, economies of scale
and skill improvements
2 Figure 2.9
Over the past decades, household consumption of durable manufacturing goods has spread at an
increasing rate around the world

100 100
Colour television
Refrigerator Vacuum cleaner
Colour television
Washing machine
75 75
Mobile telephone
Washing machine
Telephone
Refrigerator Mobile telephone
Personal
Passenger car computer
50 50 Telephone
Personal Vacuum
Bicycle computer cleaner
Smartphone
Microwave oven
25 25
Bicycle Passenger car

Motorcycle Microwave oven Motorcycle
Smartphone
0 0
1980 1985 1990 1995 2000 2005 2010 2016 1980 1985 1990 1995 2000 2005 2010 2016

Increasing production efficiency and and allowing them to expand production and employ
raising purchasing power more workers.
Figure 2.13 shows the average annual percentage
Reducing the prices of manufactured goods change in labour productivity and the price index
As shown in Chapter 1, prices of manufacturing between 1970 and 2012 for countries in different
goods display a systematic downward trend relative development groups. It shows that agriculture and
to prices in all other sectors of the economy. This manufacturing had much higher labour productiv-
is closely related to an important characteristic of ity than services for all country groups except least
the industrial sector—its higher potential for pro- developed countries over the period. Given the nor-
ductivity gains when compared with the rest of the mal patterns of structural change, in which the share
economy. The long-run patterns of structural change of agricultural employment declines (and does so
are consistent with productivity growth and falling more rapidly than the sector’s value added) as coun-
prices in agriculture and manufacturing as countries tries develop, high labour productivity in agriculture
develop. Appelbaum and Schettkat (1995) depict the is probably associated with the move of surplus labour
postwar “Golden Age” for industrialized countries out of agriculture without reducing output much.
as a period when rapid productivity growth driven Higher productivity in manufacturing reflects capi-
by economies of scale in manufacturing resulted in tal investment, economies of scale and skill improve-
falling prices. These declines expanded markets for ments. Highly productive sectors kept their price
mass-produced goods, because the price and income increases lower than lower-productivity sectors. As a
elasticities of demand were high. Manufacturers result, output from non-manufacturing industries and
could pass on productivity increases as reduced services have become more expensive than agricultural
prices to consumers, stimulating further demand and manufactured products (see Figure 2.13, panel b).
54
“ The decline in manufacturing
prices is translated to
consumers generating gains
in their ‘real’ incomes
Figure 2.10
The speed and diffusion potential of many durable goods depend on income levels and product 2
characteristics
100

Mobile telephone
75
Refrigerator
50
Vacuum cleaner
25
Passenger car
0
0 10,000 20,000 30,000 40,000
Note: All values are for the period 1980–2016.

Source: UNIDO elaboration based on World Development Indicators (World Bank 2017b) and Euromonitor International (Economies and Consumers; Possession of Household Durables, 2016).
Figures 2.14 and 2.15 look at the productivity and after a country reaches upper-middle-income level,
price changes of different types of manufacturing which more than compensates for the decline in
products, grouping 23 manufacturing industries into employment. As a result, value added per capita in the
four categories: electronics and information and com- industry continues to grow more rapidly than GDP
munications technology (ICT) equipment (high-tech per capita even at very high levels of incomes.
investment goods), other investment goods, interme- In contrast, in the food and beverage industry, as
diate goods and final consumption goods (Annex C5, in most industries in the final consumption group,
Table C5.1 lists industries in each category). Among labour productivity grows much more slowly, because
the four categories, high-tech investment goods and of faster deceleration in the growth of value added
other investment goods tend to have higher labour per capita (Figure 2.15, panel b). High-tech industries
productivity (except in least developed countries, for seem to avoid the slowdown or satiation of demand for
which data are patchy). Figure 2.15 reveals an asso- their output by creating new demand, through inno-
ciation between higher productivity and lower price vation. New products in this sector tend to have a high
increases. price elasticity of demand, which leads producers to
Electrical machinery and apparatus is a repre- reduce prices, as a price reduction is more than com-
sentative industry within the high-tech category. pensated by an increase in the quantity demanded.
Figure 2.15 (panel a) illustrates the reaction of value
added per capita, employment and labour productiv- Increasing real incomes
ity in the industry when GDP per capita increases by A key feature of the virtuous circle presented in Figure
one percentage point (vertical axis) as income level 1.8 (Chapter 1) is that the decline in manufacturing
increases (horizontal axis). The industry experiences prices is translated to consumers generating gains in
rapid and sustained labour productivity growth even their “real” incomes. When the goods where prices are
55
“ For the virtuous circle to raise
living standards in developing
economies, international
conditions must be favourable
2 Figure 2.11
Speed of diffusion varies due to country-specific conditions
a. Cameroon b. Kenya c. Bolivia

100 100 100
75 75 75
50 50 50
25 25 25
0 0 0
0 10 20 30 40 0 10 20 30 40 0 10 20 30 40
d. Peru e. China f. Viet Nam
100 100 100
75 75 75
50 50 50
25 25 25
0 0 0
0 10 20 30 40 0 10 20 30 40 0 10 20 30 40
Number of years
Colour television Microwave oven Mobile telephone Motorcycle Passenger car Personal computer
Refrigerator Smartphone Telephone Vacuum cleaner Washing machine
Note: Only products with less than 40 percent household ownership in 1980 are included. Counting begins from 1980 or the year when ownership exceeds 1 percent.
declining most rapidly represent an important share of than others, tend to gain greater more from this price
the consumption basket the overall purchasing power effect than from increases in variety and quality. These
of consumers will be significantly augmented, even if issues are further elaborated in Chapter 3.
their nominal incomes remain the same.
For real consumption wages (the nominal wage Challenges and opportunities from
divided by the price of consumption goods) to the virtuous cycle
increase, the prices of consumer goods need to increase For the virtuous circle to raise living standards in
more slowly than income. They are likely to do so if developing economies, international conditions must
the industry has access to less expensive investment be favourable. The most fundamental condition for a
and intermediate goods, resulting from its productiv- country to start the circle is to get on the course of a
ity increase or the entry of efficient domestic and for- steady income increase. If a large share of the popula-
eign producers (see Lewis and Peng 2017). tion is in poverty and facing no productivity increases,
Successful diversification and increased demand a country can stay mired in stagnation, unable to
for new products can further drive the virtuous cir- increase its income or consumption. This situation
cle. Massification of an initially exclusive product can is typical when a country is at war or in political or
make the product affordable or increase real wages. macroeconomic turmoil. Under such circumstances,
Low-income consumers, who are more price sensitive the rate of physical and human capital divestment or
56
“ If a large share of the population
is in poverty, a country can stay
mired in stagnation, unable to
increase its income or consumption
Figure 2.12
Demand for necessities gives new impetus
depreciation can be higher than that of investment,
leading to falling productivity and income. In such
2
to labour-intensive industries in low-income
countries countries, the priority should be to restore stability
and improve the overall economic and political frame-

400
Value added per capita (constant 2005 $, log scale)
work. Efforts by the international community are

150 important in restoring peace and economic stability.
Once a country is on the path of a steady income
55
increase, it can see an increase in demand for manufac-
20 tured goods, thanks to the higher income elasticity of
demand. However, to move from changes in demand
7
patterns to new manufactured goods, a country needs
3
Chemicals and chemical products access to technology. The existing regime of technol-
Machinery and equipment n.e.c.
Food products and beverages
Electrical machinery and apparatus n.e.c.
ogy transfer between countries, particularly from
1
Motor vehicles, trailers and semi-trailers
Basic metals advanced to developing countries, dictates how much
Rubber and plastics products
Fabricated metal products, except and how rapidly countries can acquire new technolo-
machinery and equipment
Textiles
Wearing apparel; dressing and dyeing fur
gies. Barriers to international technology transfer and
0
1,100 3,000 11,000 22,000 40,000
trade often limit the expansion of existing industries,
GDP per capita (constant 2005 PPP$, log scale) preventing them from realizing economies of scale
Note: All values are for the period 1963–2013. GDP is gross domestic product, PPP is purchasing and hence increasing productivity and reducing rela-
power parity and n.e.c. is not elsewhere classified. Estimation sample comprised of large countries.
Country classification is based on Haraguchi (2015), who defines large countries as having tive prices. Such barriers may prevent another driving
12.5 million inhabitants or more. Industry group classification is based on Annex C2, Table C2.1.
Source: UNIDO elaboration based on the INDSTAT2 ISIC, Rev. 3. database (UNIDO 2017d), Penn
force of the virtuous circle—the real income effect—
World Tables 7.1 (Heston et al. 2012) and World Development Indicators (World Bank 2017b).
from materializing.
Figure 2.13
Manufacturing sector increases labour productivity faster and prices slowly
a. Average annual percentage change in productivity b. Average annual percentage change in value added price index
4 8
Average annual change in labour productivity (percent)
Average annual change in value added price index (percent)
1 4
–1
–2 0
Industrialized Emerging industrial Other developing Least developed Industrialized Emerging industrial Other developing Least developed
economies economies economies countries economies economies economies countries
Agriculture Manufacturing Non-manufacturing Services
Note: All values for the period 1970–2012 and are in constant 2005 $. Industrialization level classification is based on Annex C1, Table C1.2.
Source: UNIDO elaboration based on Lewis and Peng (2017), the INDSTAT2 ISIC, Rev. 3. database (UNIDO 2016). Value added data is adapted from the National Accounts Main Aggregates Database, by
United Nations Statistics Division, ©2015 United Nations. Reprinted with the permission of the United Nations.
57
“ To move from changes
in demand patterns to new
manufactured goods, a country
needs access to technology
2 Figure 2.14
The higher the labour productivity is, the lower the price increase in the manufacturing sector
a. Average annual change in labour productivity b. Average annual change in value added price index
20 10
Average annual change in labour productivity (percent)
Average annual change in value added price index (percent)

10
–10
–10
–20 –20
Industrialized Emerging industrial Other developing Least developed Industrialized Emerging industrial Other developing Least developed
economies economies economies countries economies economies economies countries
Electronics-related high-tech investment goods Intermediate goods Final consumption goods Other investment goods
Note: All values are for the period 1970–2012 and in constant 2005 $. Industrialization level classification is based on Annex C1, Table C1.2.
Source: UNIDO elaboration based on Lewis and Peng (2017) and the INDSTAT2 ISIC, Rev. 3. database (UNIDO 2016).
Figure 2.15
Patterns of value added, employment and labour productivity change in electrical and machinery and
food and beverage industries
a. Electrical machinery and apparatus n.e.c. b. Food and beverages

6 3
Elasticity
Elasticity
4 2
Labour productivity
Labour productivity
2 1
Value added per capita
Value added per capita

0 0
Employment–population ratio
–2 –1
Employment–population ratio
–4 –2
0 10,000 20,000 30,000 40,000 0 10,000 20,000 30,000 40,000
GDP per capita (constant 2005 PPP$) GDP per capita (constant 2005 PPP$)
Note: All values are for the period 1991–2013 and in constant 2005 $. GDP is gross domestic product, PPP is purchasing power parity and n.e.c. is not elsewhere classified.
Source: Haraguchi and Rezonja (2013).
58
“ Access to new technologies
can help producers—including
those currently marginalized
in international networks—tap
hitherto inaccessible markets
In the interplay between demand and supply, inno-

vation and new technologies are not limited to creating
stages (see Chapter 3). Rapid and sustained growth of
manufacturing industries, however, usually requires
2
new products and improving existing ones. Innovation penetration of foreign markets, where producers can
is also required to reduce transaction costs, enabling find faster growth of demand for their products after

producers to reach their target markets. Improved air- domestic demand slows. Figure 2.16 shows that house-
freight, shipping containers and modularity are a few hold ownership of many products is still less than
of the innovations that accelerated the flow of goods 50 percent in large emerging economies like China,
to markets in the past, helping their diffusion. Today, India and Nigeria, suggesting huge potential for man-
ICTs allow firms to serve new sources of demand by ufacturers to serve the increasing demand of these
establishing an instantaneous connection with con- countries in the years to come.
sumers. Access to new technologies can help producers
—including producers in countries that are currently Keeping the virtuous circle turning
marginalized in international production networks— Numerous pitfalls can prevent the circle from func-
tap hitherto inaccessible markets (Box 2.2). tioning. First, the income increase at the macro level
Domestic demand provides a crucial initial impe- may not reflect conditions across households at the
tus for many manufacturing industries, including micro level, because of income inequality. Especially
export-oriented ones, at least in their embryonic in developing countries, an upper class is likely to
Box 2.2
Technology and changing patterns of demand: Implications of the spread of e-commerce platforms
for developing and emerging countries
Historically, changes in technology have had an important High fixed costs associated with entry into world mar-
influence on patterns of demand and therefore on the evo- kets, and agglomeration economies, are some of the factors
lution of the manufacturing sector. All industrial revolutions that explain why only few firms and countries have benefited
were enabled by clusters of technologies that radically from an expanding global demand. The growth of online
changed not only the way goods are produced, but also markets, enabled by the rollout of ICTs, has the potential
how they are distributed and consumed. Technology dra- to reverse the trend towards concentration, thus enabling
matically reduces the costs of transport and coordination, a more even distribution of the gains from globalization.
enabling producers, in principle, to reach ever-expanding E-commerce platforms that lower the fixed costs associ-
markets. During the first industrial revolution, for instance, ated with reaching destination markets, making it easier to
steam-powered mechanical production enabled the phys- match demand with supply, are a case in point. With the aid
ical separation of consumption from production, leading of the internet, the cost of activities such as, for example,
to the emergence of a national and, later, a global market searching for clients, establishing a distribution channel, or
for manufactured products. establishing brand reputation, are significantly reduced.
Each wave of technological change has reinforced By lowering the cost of matching buyers with sellers,
this trend, leading to the consolidation of a global, if highly e-commerce platforms enable smaller firms, and par-
segmented, source of consumer demand. The emer- ticularly those in low- and middle-income economies, to
gence of a global market has led to unparalleled gains access markets all over the world. A recent study finds
in prosperity across the world. Yet evidence is mounting that the effect of distance on international trade flows—
that gains have not been evenly distributed. While global across 61 countries and for 40 product categories—is
between-country inequality appears to be on the decline 65 percent smaller when using an e-commerce platform
since the turn of the century, as a result of high growth relative to “offline” cross-border transactions (Lendle et al.
in emerging industrial economies, within-country inequal- 2016). Therefore, the technologies underpinning online
ity remains high in both developing and industrialized markets, by offering smaller firms in developing econo-
countries (Milanovic 2016). Moreover, industrial activity is mies the opportunity to benefit from the global market at
increasingly concentrated in a narrow set of manufactur- a lower capital requirement than previously possible, have
ing hubs around the globe (Chapter 7). the potential of making globalization more inclusive.
59
“ The persistence of high
income inequality could dampen
consumption of manufactured
products and diminish the potential
benefits of the virtuous circle
2 Figure 2.16
Diffusion patterns of durable goods vary across countries at different stages of industrialization
a. Industrialized economies b. China

100 100
Colour television
Refrigerator Vacuum cleaner Mobile
telephone
Washing machine Bicycle

75 75 Refrigerator
Mobile telephone
Telephone Colour television

Telephone
Passenger car
50 50
Personal computer
Personal Motorcycle
Bicycle computer Washing machine
Smartphone
Microwave oven
25 25 Microwave
oven Passenger
car
Motorcycle
Vacuum
cleaner
0 0 Smartphone
1980 1985 1990 1995 2000 2005 2010 2016 1980 1985 1990 1995 2000 2005 2010 2016
c. India d. Nigeria
100 100
Mobile telephone
Mobile telephone
75 75
Colour television
Bicycle
50 50
Colour
television
Motorcycle
Refrigerator Bicycle Motorcycle
25 Personal 25
Washing computer Refrigerator
machine Microwave
Telephone oven Personal computer
Passenger Microwave
car oven
Vacuum cleaner Passenger car Smartphone
Vacuum
0 cleaner 0
1980 1985 1990 1995 2000 2005 2010 2016 1980 1985 1990 1995 2000 2005 2010 2016
Smartphone Telephone Washing
machine
have a very different consumption pattern from the of manufactured products and diminish the poten-
rest of the population. These households may spend tial benefits of the virtuous circle. The examples of
most of their income on imported goods. In this washing machines and vacuum cleaners are illustra-
case, increased purchasing power may not lead to the tive in this regard. When countries are compared
launch or expansion of new manufacturing industries. with the estimated level of ownership that would be
Even if a country does not have such an extreme expected at their income level, those countries that
wealth concentration, the persistence of relatively are more unequal (as shown by the Gini coefficient)
high income inequality could dampen consumption show lower diffusion rates (Figure 2.17). In the figure,
60
“ Price reduction through
massification is beneficial
for consumers, but under
certain conditions it can pose
a challenge for producers
Figure 2.17
Income inequality lowers the diffusion of household durable goods 2
a. Washing machines b. Vacuum cleaners
100 100

75 75
50 50
25 25
0 0
0 5,000 10,000 15,000 20,000 25,000 0 5,000 10,000 15,000 20,000 25,000
GDP per capita (constant 2005 PPP$) GDP per capita (constant 2005 PPP$)
Note: All values are for 2011. GDP is gross domestic product and PPP is purchasing power parity. Countries marked with red have an inequality index (Gini coefficient) above the average.
Source: UNIDO elaboration based on World Development Indicators (World Bank 2017b) and Euromonitor International (Economies and Consumers; Possession of Household Durables, 2016).
the curve presents the estimated levels of household to full foreign competition, however, may not lead to
ownership of washing machines and vacuum clean- productivity increases and price reductions. Instead, it
ers, respectively, at different income levels. Countries can weaken, even destroy, the industry. For countries
with higher than average Gini coefficient (which are in the early stage of industrialization, it is therefore
highlighted in red) tend to cluster below the curve, important to have time-bound trade and industrial
indicating low diffusion rates. A country with a high policies to provide domestic industries with space to
income inequality might fail to generate a large mid- grow.
dle class that might well demand a large amount of Several theories of the firm relate the capacity to
similar goods. The lack of a large middle class may generate rent to a degree of power over consumers, sup-
mean that domestic demand is insufficient to start the pliers or both. These theories typically postulate that
virtuous circle. Chapter 3 will analyse this issue in fur- rents depend on barriers to entry. Kaplinsky (2006),
ther detail. for example, claims that anything that allows a firm
To release labour and keep wages competitive, to construct barriers to entry and limit competition
agricultural productivity often has to improve first “de-commodifies” its output and allows it to generate
(Kalecki 1955). As demand for goods from sectors that rent. Power over rents could mean that productivity
are more intensive in capital and technology increases, increases are not passed on as price reductions.
investments in skills, technology and research and In the context of global value chains, some firms
development (R&D) play a greater role in upgrading have been able to exert power over rents further down
and sustaining manufacturing development. Unless the value chain in activities outsourced to suppliers in
improvements in such factors take place, demand for developing countries. Intense competition between
new and more sophisticated goods will be filled largely suppliers and limited competition between lead firms
by imports. have sometimes resulted in productivity increases
To keep manufacturing prices down and increase being translated into price decreases for suppliers
real income, manufacturing productivity has to and lower input prices for lead firms in industrialized
increase, and the increase has to be passed down in the economies (Milberg and Winkler 2013).
form of lower prices, not increased rents. Competition Price reduction through massification is beneficial
in the industry therefore has to be fairly high and exit for consumers, but under certain conditions it can
and entry barriers low. Exposing nascent industries pose a challenge for producers. If the price elasticity of
61
“ The virtuous circle does
not itself guarantee socially
inclusive or environmentally
sustainable outcomes
2 a product is greater than one, the increase in the quan-

tity demanded more than compensates for the price
skilled workers, the inclusiveness of the circle is weak-
ened. The trend towards greater automation of produc-
reduction. Especially for industries with large room tion skews the distribution of profits towards factory
for technological advancement and/or economies of owners and managers, to the detriment of workers.
scale, a price reduction can be met by cost reduction Excessive concentration of income at the top of the
by competitive producers. If a lower price leads to a distribution also has detrimental effects on the circle’s
higher demand, there is an opportunity for producers functioning, as a critical mass of income is needed to
to increase profits, especially if they can maintain or launch the process.
increase the profit margin through innovation. Without regulation, national or international,
In contrast, there will be a greater challenge if a competitive pressures in global markets can under-
country’s manufacturing output comes largely from mine social inclusiveness. When cost competitive-
commodified goods, for which the price elasticity is ness is achieved at the expense of labour standards,
less than one. In this case, in a globalized market a for instance, earnings and employment conditions
price reduction does not stimulate enough demand to can be severely affected, with adverse consequences
increase (or at least maintain) total revenue. In addi- on inclusiveness.6 Indeed, the lack of sufficient mate-
tion, commodifying products often offer limited scope rial resources is a key contributor to social exclusion.
for product or process innovation, so it is not easy to In some instances, the competitive pressures faced by
compensate for lower prices by reducing costs. firms in export markets encourage child labour, as well
Low-cost production is a decisive factor for success as discrimination against vulnerable groups such as
in commodified and mature goods. Being a price taker women, youth, migrant workers and people with dis-
and having a limited scope for productivity increase, a abilities (Naudé and Nagler 2015).
country needs to compensate for price reductions by The liberalization of trade and production has
increasing production volumes, which could increase heightened concerns over the trade-offs between
its global market share even with stagnant growth of price dynamics on global markets on the one hand
global demand for the product. Success in this way is and wages and employment conditions on the other.
not unusual, as seen in the rapid growth of previously The unbundling of production tasks into global value
low-income Asian countries specializing in labour- chains has enabled firms in developing and emerging
intensive industries. Chapter 4 examines the positive industrialized economies to increase their participa-
and negative aspects of relative price declines in world tion in world markets, creating significant oppor-
markets. tunities for upgrading through knowledge transfer,
learning-by-doing and learning-by-exporting for
Social inclusiveness and environmental firms in developing countries and emerging econo-
sustainability mies (UNIDO 2015a). The off-shoring of unskilled
The virtuous circle does not itself guarantee socially and semi-skilled production tasks from industrial
inclusive or environmentally sustainable outcomes. to developing economies has helped generate mass
Social inclusiveness requires that at least two condi- employment. It has also brought into the labour mar-
tions are in place. First, part of the income generated ket segments of society that may have been previously
by the circle should flow to the poorest people in soci- excluded from it.
ety, increasing welfare at the bottom of the pyramid. Employment conditions for low-skilled work-
Second, traditionally marginalized groups should be ers in suppliers within global value chains, however,
able to participate fully in the market. may not meet international employment stand-
Several global trends hinder these aspirations. ards. The globalization of production appears to be
When the largest share of income goes to highly increasingly associated with the emergence of casual
62
“ The supply of greater product
variety at affordable prices on
global markets may come at the
expense of social inclusiveness
in exporting countries
contractual arrangements offering little social protec-

tion, especially in lower-skill segments of the value
firms or home workers. This kind of employment may
be irregular and exploitative, including child labour
2
chain, where competitive pressures tend to be stronger, (Barrientos et al. 2011, Zhao et al. 2016).
and in industries characterized by flexible production. The supply of greater product variety at afford-

Suppliers to global apparel firms, for instance, seem to able prices on global markets may therefore come at
rely on irregular workers alongside regular employees, the expense of social inclusiveness in exporting coun-
with the former employed in lower-skill, time-sensitive tries. The downgrading of employment conditions—
segments of production, such as packaging or trans- especially in labour-intensive, lower-skill segments
port (Plank et al. 2012, Plank and Staritz 2016). of global value chains—as well as the emergence of
Irregular workers are often from vulnerable exploitative, if not illegal, employment arrangements,
groups, such as migrant workers or women. Women represent a significant challenge from the viewpoint
employed by suppliers to lead firms in global value of global welfare. Greater effort will be required
chains are generally young and unskilled. They tend from governments and the private sector to uphold
to be employed in more labour-intensive and export- labour standards and regulations, to ensure that all
oriented segments of global production, such as the workers benefit from the opportunities offered by
apparel and textile industries in low-income countries, globalization.
where earnings are low and opportunities for skills More broadly, how inclusive the circle is at the
upgrading limited (Caraway 2007). By contrast, men global level depends on the extent to which countries
in these industries are more likely to work in skilled benefit from its income-generation mechanisms, as
(and better-paid) occupations.7 Women tend to be well as the modality in which they participate. When
over-represented in more insecure, low-paid work, countries remain caught in the lower segments of
often in temporary or seasonal employment arrange- global production—or are left out altogether—the cir-
ments (Barrientos et al. 2011). When irregular and cle cannot be regarded as globally inclusive. Chapters
casual workers are over-represented by women, they 3 and 4 will analyse this point in further detail.
often face a double form of discrimination at work, Sustainability also has to be taken into account,
through their gender and their employment status as discussed in Chapter 5; it is a vital part of social
(Plank et al. 2012). welfare. A trade-off arises between the massification
A trend parallel to the increased casualization of of manufacturing production and the environmen-
employment is the rise in highly exploitative and even tal sustainability of consumption. Improvements in
illegal employment forms, such as contemporary forms energy efficiency and structural change could help
of forced labour, within certain niches of the global reduce carbon dioxide emissions and material use per
economy. A study of contract labour in the horticul- unit of value added, but they are not likely to be suf-
ture value chain finds that the seasonal, highly flexible ficient to reduce them as production volume grows.
nature of production in agro-industries tends to rely to Along with further advances in greener production
a large extent on migrant workers who are denied legal technology and its transfer, recycling and a shift in
employment benefits and forced to work in conditions consumption to green products have to play a greater
of near slavery (Barrientos 2013). Similar conditions role in reducing the environmental impact of manu-
may emerge when suppliers sub-contract to informal facturing consumption.
63
2 Notes
1. Their study is based on household surveys con- differentiation” and inter-sectoral variety,”
ducted in 13 countries: Côte d’Ivoire, Guatemala, which correspond to “related” and “unrelated”
India, Indonesia, Mexico, Nicaragua, Pakistan, used in other studies. These are created by “post-
Panama, Papua New Guinea, Peru, South Africa, innovation” improvements or “pervasive” innova-
Timor-Leste and United Republic of Tanzania. tions, respectively.
2. In view of the low representation of industri- 5. Frenken et al. (1999) compare unrelated variety
alized economies in the sample of the Global with the concept of diversity in biology (the num-
Consumption Database, this group of countries ber of species in a habitat) or the number of genu-
is analyzed together with the emerging industrial inely different goods in an economy.
economies. The inclusion of a disproportionately 6. The International Labour Organization (2011)
large number of developing countries in the sam- has codified four core international labour stand-
ple is somewhat mitigated by the fact that the ards: freedom of association, the right to collec-
global distribution of income is highly skewed tive bargaining, abolition of child labour and
(peaking at a low income level), as Chotikapanich elimination of discrimination at work.
et al. (1997) show. 7. Female participation in the manufacturing sector
3. The correspondence between manufacturing seems higher at lower levels of income and indus-
industries and these product categories is detailed trialization. As countries industrialize and get
in Moneta and Stepanova (2017). richer, female participation rates in manufactur-
4. See, for example, Frenken et al. (1999), Saviotti ing production appear to decline. See Kucera and
and Frenken (2008) and Yeon et al. (2016). Tejani (2014) for a comprehensive treatment of
Saviotti et al. (2016) refer to “intra-sectoral the issue.
64
Chapter 3
Capturing incomes from domestic

demand for manufacturing
Domestic demand, income creation extent to which three forces—increases in real wages,
and industrial development the expansion of the middle class and the diversifica-
Initiating the virtuous circle of manufacturing con- tion of private household consumption—are related to
sumption requires increased demand for locally pro- the income created by domestic demand for manufac-
duced manufactured goods. This demand can be turing goods.
domestic or foreign. A key aspect of the income-cre- It finds a clear positive relationship between
ation potential of demand is the roles the two sources the three forces and the generation of incomes from
play in the development process. Some countries rely domestic demand. To benefit from them, however,
more on their domestic markets; others put more countries need a certain level of industrial capabilities:
emphasis on foreign demand. This relationship can Countries with higher competitive industrial perfor-
also change through time, as observed in several devel- mance tend to benefit most.
oping countries during the 1990s or—in the opposite One additional channel to take into considera-
direction—in the recent rebalancing experience of tion in the virtuous circle is related to the evolution
certain large emerging economies, notably, China. of manufacturing prices and their impact on domes-
This chapter examines the domestic channels tic consumers. Broad trends in consumer prices of
that lead to income creation along the virtuous circle selected manufactures in countries at different stages
detailed in Chapters 1 and 2. Its analysis shows that of industrial development support the finding that the
the domestic absorption is the most important compo- relative price of manufactures tends to decline. Larger
nent of final demand for manufacturing, at world level declines in relative prices are observed in industries
and across countries at different stages of industriali- with higher technological sophistication or greater
zation. However, as countries get richer, the relative exposure to foreign competition. Middle-income
importance of domestic absorption diminishes and consumers tend to benefit most from these declines,
exports of manufactured goods tend to gain ground. because they allocate larger shares of their budget to
The share of domestic absorption sourced from abroad goods that became relatively cheaper during the past
(the purchase of final imported goods) and the foreign decade. In this self-reinforcing process, expansion of
content of manufactures sourced locally also tend to the middle class fosters domestic demand for manu-
increase as countries industrialize. As such leakages factures (and the income generation associated with it)
increase with development, spurring the value of and manufacturing development reduces the prices of
domestic exports becomes key to sustaining the virtu- the good consumed mostly by the middle class.
ous circle. The last section of this chapter examines some
Income creation by domestic demand depends on policy implications, which Chapter 6 elaborates on.
the origin of this demand and on the chain of linkages A general conclusion is that capturing incomes from
connecting domestic and foreign suppliers. This chap- domestic demand requires certain policies oriented to
ter builds on multiregional input-output techniques to improving income distribution and social inclusive-
account for these linkages and assess the income crea- ness, strengthening real wages and building industrial
tion potential of domestic demand for manufactur- capabilities in line with the expansion and diversifica-
ing goods. The results show that such demand is a key tion of domestic private consumption. The appropri-
driver of income generation, especially in developing ateness of government interventions hinges on a vari-
countries, and that its relative importance has been ety of factors, ranging from a country’s level of income
growing in recent years. The chapter examines the and industrialization to its current factor endowment.
65
“ Capturing incomes from domestic
demand requires policies oriented
to improving social inclusiveness
and building industrial capabilities
3 The importance of domestic demand

For at least 25 years, domestic absorption has driven
important (Jalilian 2017). The share of domestic
demand declined in all county groups in 1990–2000.
final demand for manufacturing, both at world level Yet since 2000 the relative size of domestic absorption
and across countries at different stages of industrial in developing and emerging industrial economies has
Capturing incomes from domestic demand for manufacturing
development.1 been growing again. This change reflects an important

There are differences between country groups. shift in the global economy: the rebalancing of cer-
More advanced economies tend to rely more on for- tain large emerging industrial economies, especially in
eign demand, although domestic absorption remains Asia.
by far the largest component. The share of domes- As countries get richer, the gap between domestic
tic absorption in final demand for manufacturing and foreign sources of demand shrinks: There is a clear
goods in industrialized economies is much lower negative correlation between the income level of coun-
than the world average, and this difference has been tries and the relative importance of domestic demand
growing. In 2013 domestic absorption represented for manufactured goods (Figure 3.2). At lower levels
about 84 percent of world final demand for manu- of income, countries tend to rely mainly on the domes-
facturing goods, but just 67 percent of industrialized tic market. As income grows, foreign markets start
country demand. In contrast, least developed coun- playing a bigger role in fostering domestic industriali-
tries (LDCs) rely most on domestic demand, which zation (Jalilian 2017).
accounted for almost 95 percent of their final demand Private household consumption accounts for
for manufactured goods (Figure 3.1). more than half of domestic absorption of manufac-
Figure 3.1 also shows a declining trend in the tures in all country groups (Figure 3.3). The second-
importance of domestic demand, at the world level and most important component is gross capital forma-
for all country groups, pointing to the fact that glo- tion, which accounts for 32–37 percent of domestic
balization tends to make foreign demand increasingly absorption. Governments and non-profit institutions
Figure 3.1
Changing trends in the relative importance of domestic absorption of manufacturing goods
100
Share of domestic absorption in final demand for manufacturing goods (percent)
90
World
80
70
60
1990 1995 2000 2005 2010 2013
Note: Domestic absorption comprises private household consumption, gross capital formation, and final consumption by governments and non-profit institutions (see Box 1.1 in Chapter 1). Each line shows the
unweighted average of the indicator for the world and country groups. Industrialization level and manufacturing sector classifications are based on, respectively, Annex C1, Table C1.2. and Annex C2, Table C2.2.
66
“ Domestic demand leakages
towards the consumption of foreign
goods can curtail the potential
income of domestic producers
Figure 3.2
Decreasing importance of domestic absorption of manufacturing goods as countries get richer 3
100
Share of domestic absorption in final demand for manufacturing goods (percent)

90
80
70
60
50
40
30
6 7 8 9 10 11 12
GDP per capita (constant 2011 PPP$, natural log scale)
Note: Based on data from 2013. GDP is gross domestic product and PPP is purchasing power parity. See definition of domestic absorption in notes to Figure 3.1. Manufacturing sector classification is
based on Annex C2, Table C2.2.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013).
Figure 3.3
Private household consumption is the most
important component of domestic absorption together account for 6–12 percent of domestic con-
of manufacturing goods sumption of manufactures.
Industrialized
Leakages abroad and the foreign
economies
content of domestic production
Domestic demand leakages towards the consumption
of foreign goods can curtail the potential income of
Emerging industrial
economies domestic producers, with important repercussions on
the income multiplier effects of demand.
A striking fact of global development in recent
Other developing decades has been the increasing fragmentation of pro-
economies
duction across regions. This phenomenon is reflected
in the increase in imported intermediates as a share of
Least developed
global production (see, for example, Gereffi 2015 and
countries
Sturgeon and Memedovic 2010). The increased inter-
dependence across economies is also reflected in grow-
0 25 50 75 100
Percent
ing import shares in the final domestic absorption of
Private households Gross capital Non-profit institutions manufacturing goods. Both at the world level and by
consumption formation and government consumption
country groups, the share of imported goods in final
Note: All values are for 2013 and in current $. See definition of domestic absorption in notes to Figure
3.1. Each bar shows the distribution by component of the domestic absorption for final manufactures. domestic absorption of manufactures has increased,
Values refer to the unweighted average by country group. Industrialization level and manufacturing
sector classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2. particularly since 2000, despite a short slump during
Source: de Macedo and Lavopa (2017) based on the Eora Multi-Region Input-Output database
(Lenzen et al. 2012; Lenzen et al. 2013).
the global financial crisis (Figure 3.4).
67
“ On average almost one‑third
of the total value of domestically
produced final manufactures
has a foreign origin
3 Figure 3.4
A widespread increasing share of imports in the domestic absorption of manufacturing goods
50
Share of imports in the domestic absorption of manufacturing goods (percent)
45
40
World
35 Emerging industrial
economies
30
25
20
1990 1995 2000 2005 2010 2013
Note: Values are in current $. See definition of domestic absorption in notes to Figure 3.1. Each line shows the unweighted average of the indicator for the world and country groups. Industrialization level
and manufacturing sector classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2.
More advanced economies have larger shares of This sort of indirect leakage can be quantified by
imported goods (48 percent) than LDCs (32 percent). using input-output techniques. Applying these tech-
Richer consumers tend to be more integrated in world niques to the Eora Multi-Region Input-Output data-
markets, because their demand patterns are more base (Lenzen et al. 2012, Lenzen et al. 2013) reveals
diversified and harder to fully source from domestic the domestic and foreign value added embodied in
providers. domestically produced manufactured goods that are
In a globalized economy, leakages are not limited absorbed by domestic demand (Figure 3.5).3 On aver-
to purchases of imported final goods: Even final goods age almost one-third of the total value of domestically
that are produced domestically have components of produced final manufactures has a foreign origin. This
foreign origin. share is about 10 percentage points larger in industri-
Components from abroad might bring positive alized economies than in developing countries.
effects to the domestic economy. They can boost pro- This implies that countries tend to import more
ductivity in importing firms that, taking advantage of final goods as they get richer, and consumer preferences
global specialization, draw inputs from the technology diversify from less sophisticated, domestically sourced
frontier. Literature on international trade suggests that goods. At the same time, the goods they produce domes-
intermediate goods imports, embodying new tech- tically tend to draw increasingly from inputs and com-
nologies, can generate new knowledge within import- ponents sourced from abroad, as domestic production
ing firms (Foster-McGregor et al. 2013). Imports can becomes increasingly integrated into global value chains.
also raise productivity owing, more broadly, to their Higher leakages of domestic demand together
higher quality relative to domestic alternatives. 2 The with increased foreign content in domestic produc-
purchase of components from abroad, however, would tion result in larger requirement of foreign exchange.
leak part of the income created in the production pro- A country’s foreign exchange requirements will thus
cess towards foreign producers. generally increase rapidly with income.
68
“ Multi‑regional input‑output
tables make it possible to estimate
the share contributed by each
industry of each country to the
final production of a good
Figure 3.5
Larger foreign value added embodied in
local income, depending on the complex chain of pro-
ductive linkages operating in the domestic economy
3
domestically produced and absorbed final
manufacturing goods in industrialized economies and abroad, from local suppliers to final goods produc-
ers. This section analyses the roles of domestic and for-

Industrialized
eign demand in driving income creation.
economies
Tracing the linkages

The approach to studying the income generated by the
Emerging industrial
economies final demand for manufacturing builds on the tradi-
tional toolkit of input-output analysis applied to inter-
connected economies at the world level. A large body
Other developing of literature examines the rise of global value chains by
economies
looking at trade in value added.5
The basic intuition of the approach is that final
Least developed
demand triggers a series of inter-linked sources of
countries
demand for intermediate inputs and factors that are
needed for the production of that good. Value is added
0 25 50 75 100
Percent
by certain industries in certain countries at each stage of
Domestic value added Foreign value added production. The price paid by consumers for any good
is the sum of each bit of value added along the process.
Note: All values are in current $ and refer to the unweighted average by country group for the
year 2013. See definition of domestic absorption in notes to Figure 3.1. Each bar shows the Multi-regional input-output tables make it possible
domestic and foreign value-added components of final manufactures produced and absorbed
domestically. Industrialization level and manufacturing sector classifications are based on, to trace back all these intermediate demands and esti-
respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2.
Source: de Macedo and Lavopa (2017) based on the Eora Multi-Region Input-Output database
mate the share contributed by each industry of each
(Lenzen et al. 2012; Lenzen et al. 2013).
country to the final production of that good. Using
this approach, it is possible to identify how much value
Lack of foreign exchange might put pressure on different countries add towards the production of one
the balance of payments and lead to external crisis. good that is finally absorbed in one country.6
Domestic demand needs to be stimulated along- The approach also allows for measuring how much
side domestic production capabilities and foreign value one given country adds towards the production
demand, to avoid getting onto an unsustainable path of all final manufactured goods worldwide.7 It captures
for the external accounts (UNCTAD 2013b). In some (from one country’s point of view) how much domes-
instances, encouraging foreign investment, particu- tic value added—and hence, income—is generated by
larly offshoring production by firms in higher-income catering to world demand for final manufactured goods
countries, can facilitate the emergence of export- (DVA MAFID). Of that domestic value added, the analy-
oriented firms even in countries at very low levels of sis then breaks it down into the portion associated to
industrialization, providing them with the foreign final absorption taking place domestically (DVA MADA)
exchange needed to finance imports.4 from that which takes place abroad (DVA MAFA). All
value created in an economy (its gross domestic prod-
The contribution of domestic demand uct [GDP]) in one period is directly or indirectly tied
to income creation to final demand done at home or abroad.
Not all demand in the domestic economy generates DVA MAFID can be generated within manufac-
local income. By the same token, some of the demand turing industries, or any other sector of the econ-
that originates outside the domestic economy generates omy. The focus is not on the value added created in
69
“ In developing countries,
domestic demand is the main
contributor to domestic value
added; in industrialized countries,
foreign demand is more important
3 manufacturing industries (the production-side per-

spective) but on the income created by the final con-
The contribution of domestic demand is particularly
important in LDCs, where it accounted for more than
sumption of manufactured goods (the demand-side 70 percent of DVA MAFID in 2013. In all country groups
perspective)—regardless of the sector in which this the domestic share is declining, however, pointing to
income (value added) is created. 8 the growing global fragmentation of production.

The shares of DVA MAFID exceed the share of The income generated by the final demand for
manufacturing value added (MVA) in GDP in all manufacturing goods is a very important compo-
country groups and years shown in Figure 3.6. MVA nent of GDP. Over time and for all country groups
(at current prices) accounted for about 20 percent of it increases and tends to become more globalized. In
GDP in 1990, and 14 percent in 2014. The shares of emerging industrial and developing economies, how-
DVA MAFID range from 16 percent in LDCs to 25 per- ever, the domestic component of final demand for
cent in industrialized economies. In contrast with manufacturing remains much more important than
MVA, these shares increased between 1990 and 2013 the foreign component.
in all country groups, with the largest increases occur- Figure 3.8 presents the average annual growth
ring in industrialized economies. rate of DVA MAFID and the contribution of domestic
Domestic value added is generated as a result of absorption to growth in 1990–2000 and 2000–2013.
final absorption of manufacturing goods taking place It also indicates the average growth rate in differ-
both domestically and abroad, but the relative weight ent country groups and the average contribution of
of the two components varies across country groups. domestic demand. These averages provide a refer-
In developing and emerging industrial economies, ence point for distinguishing four stylized cases:
domestic demand is the main contributor to domes- rapid growth with high reliance on domestic demand
tic value added. In contrast, in industrialized econo- (quadrant I), rapid growth with low reliance on
mies, foreign demand is more important (Figure 3.7). domestic demand (quadrant II), slow growth with
Figure 3.6
A significant share of GDP is generated by the final demand for manufacturing goods, especially in
industrialized and emerging industrial economies
30
Domestic value added generated by final demand for manufacturing goods
as a share of GDP (percent)
1990
2000
2013
25
20
15
10
0
Industrialized economies Emerging industrial economies Other developing economies Least developed countries
Note: All values are in current $ and refer to the unweighted average by country group for the year 2013. The height of each bar represents the share of domestic value added generated by manufacturing
final demand in GDP (gross domestic product). Industrialization level and manufacturing sector classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2.
70
“ The income generated by the final
demand for manufacturing goods is
a very important component of GDP
Figure 3.7
Higher contribution of domestic absorption to the income generated by the final demand for 3
manufacturing goods in less industrialized economies
100
Contribution of domestic absorption to the income generated
by final demand for manufacturing goods (percent)

1990
2000
2013
75
50
25
0
Note: All values are in current $ and refer to the unweighted average by country group for the year 2013. See definition of domestic absorption in notes to Figure 3.1. The height of each bar represents the
contribution of domestic absorption to the income generated by the final demand for manufacturing goods. Income is proxied by domestic value added. Industrialization level and manufacturing sector
classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2.
Figure 3.8
Increasing impact of domestic absorption of manufacturing goods on income generation across all
industrialization levels
100
Contribution of domestic absorption to new income generated
by final demand for manufacturing goods (percent)
IV I
75

50
25
III II
0
0 2 4 6 8 10 12 14
Income growth generated by final demand for manufacturing goods (percent)
Note: All values are in current $ and refer to the unweighted average by country group for the period 1990–2000 (starting value) and the period 2000–2013 (ending value). Growth refers to the annual
compound growth rate of each period and income is proxied by domestic value added. See definition of domestic absorption in notes to Figure 3.1. Industrialization level and manufacturing sector
classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.2.
71
“ The rapid acceleration
of income creation by final
goods has increasingly relied
on domestic markets
3 low reliance on domestic demand (quadrant III) and

slow growth with high reliance on domestic demand
Figure 3.9 breaks these figures out by region.
Developing countries in Africa and Asia and the
(quadrant IV). Pacific show similar patterns of high acceleration
The rightward movement of all country groups in growth rates and increased reliance on domestic
in Figure 3.8 reflects the acceleration in the growth demand. Countries in the latter region show the most
of nominal incomes generated by final demand for rapid growth rates. Emerging industrial and develop-
manufactured goods. The increase is larger for LDCs, ing economies in Latin America show slight declines
where average annual growth increased from about in their growth rates and a marked increase in the
3.5 percent in the 1990s to almost 9.0 percent after importance of domestic markets. The group of other
2000. (These rates are nominal figures, which include developing economies in Europe is the only country
increases in both quantities and prices. Thanks to the group in which the importance of domestic demand
commodity price boom, world inflation was higher declined between the two periods.
beginning in the 2000s.9) The upward movement of
non-industrialized country groups indicates that the Forces underlying the increase in the
rapid acceleration of income creation by final demand contribution of domestic demand
for manufacturing goods in these economies has Three underlying forces lay behind the sharp increase
increasingly relied on domestic markets. in the contribution of domestic absorption to income
Figure 3.9
Trends in European demand for manufacturing goods differing from other geographical regions:
Stable or decreasing contribution of domestic absorption
Africa Americas
100 100
Contribution of domestic absorption to new income generated by final demand for manufacturing goods (percent)
75 75
50 50
25 25
0 0
0 5 10 15 0 5 10 15
Asia and Pacific Europe

100
100
75
75
50
50
25
25
0
0 5 10 15 0 5 10 15
0
Income growth generated by final demand for manufacturing goods (percent)
Least developed countries Other developing economies Emerging industrial economies Industrialized economies
Note: All values are in current $ and refer to the unweighted average by country group for the period 1990–2000 (starting value) and the period 2000–2013 (ending value). Growth refers to the annual
compound growth rate of each period and income is proxied by domestic value added. See definition of domestic absorption in notes to Figure 3.1. Regional, industrialization level and manufacturing
sector classifications are based on, respectively, Annex C1, Table C1.1, C1.2 and Annex C2, Table C2.2.
72
“ Wages are an important
driver of aggregate demand
generated by manufacturing demand: increases in real

wages, the expansion of the middle class and the diver-
of the middle class. More equal societies generate
greater domestic demand, particularly manufacturing
3
sification of domestic consumption. demand. Middle-income households allocate larger
shares of their incomes to the consumption of manu-

Increases in real wages factured goods (poor households tend to allocate more
Wages are an important driver of aggregate demand. of their incomes to necessities, and richer ones towards
Empirical evidence shows that aggregate demand services and luxuries).
and productivity respond favourably to increases in Definitions of what constitutes middle-class status
wages as a share of GDP (Lavoie and Stockhammer in the developing world—as well as estimates of its
2013). And as gains in wage income are likely to be size—vary. But the share of the population in low- and
spent on consumption items, an increase in the wage middle-income countries with access to some discre-
share in GDP or an increase in real wages is expected tionary income appears to have grown in recent years.
to boost domestic demand, at least in the short run. A recent study estimates that the global middle class
The average annual growth rate of DVA MADA during (defined as people living on $10–$20 a day) nearly
the period of high domestic demand–driven growth is doubled between 2001 and 2011, rising from 399 mil-
positively correlated with the growth rate of real wages lion to 784 million people (Kochhar 2015).10 The size
(Figure 3.10). of the upper-middle class—those living on $20–$50
per day—also increased, boosting its ranks by 176 mil-
Expansion of the middle class lion people over the same period. Nearly 1.4 billion
Closely linked to the increase in wages is the change people had reached middle- or upper-middle class sta-
in the distribution of income, in particular the growth tus by 2011 (Kochhar 2015).11
Figure 3.10
Increasing gains in real wages go hand in hand with income generated by domestic absorption of
manufacturing goods
25
20
15
10
–5
–10 –5 0 5 10 15 20
Growth in average real wages (percent)
Note: All values are for the period 2001–2011. Income is in current $. Real wages are in 2011 PPP$ (PPP is purchasing power parity) and calculated from Penn World Table 9.0 by multiplying the share of
labour compensation in gross domestic product (GDP) and the output-side real GDP at current PPP$ and dividing by the number of persons engaged. Growth refers to the annual compound growth rate
of the period and income is proxied by domestic value added. Manufacturing sector classification is based on Annex C2, Table C2.2.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013) and Penn World Table 9.0 (Feenstra et al. 2016).
73
“ Extreme concentration of wealth
at the top of the distribution may
threaten the viability of the markets
that support manufacturing firms
3 The expansion of the middle class was not even

across the world. Larger increases in the size of the
in higher demand for luxury goods rather than domes-
tically sourced consumer products (Chang 1997).
middle class are associated with more rapid growth
in incomes generated by the domestic absorption of Diversification of consumption
manufacturing goods (Figure 3.11). The diversification of consumption baskets is also

Rosenstein-Rodan (1943) was among the first to important. As seen in Chapter 2, the shift from basic
identify the emergence of a large internal market as necessities to more sophisticated manufactures sets in
a precondition for industrialization. Large markets motion the virtuous circle of consumption.
enable the introduction of increasing returns to pro- Measuring the diversification of domestic con-
duction technologies that could not have been profit- sumption is not easy, especially across countries.
ably put to use otherwise. For industrial markets to Several international organizations have compiled
expand, purchasing power needs to be concentrated in and harmonized household data. A leading initiative
the hands of people who consume final manufactured is the International Comparison Program, led by the
products—namely, middle-class households (Murphy World Bank. Using 2005 and 2011 data compiled by
et al. 1989). this program, it is possible to estimate the degree of
The emergence of a salaried consumer class there- diversification of consumption baskets at the country
fore has significant bearing on a country’s prospects level (Box 3.1). These proxies can be used to analyse
for industrialization. In contrast, extreme concen- the relationship between consumption diversification
tration of wealth at the top of the distribution may and income created by domestic demand.
threaten the viability of the markets that support The relationship between the diversification of
manufacturing firms, with a stifling effect on industri- domestic private household consumption and the cre-
alization. Greater inequality may result, for instance, ation of income from domestic demand is positive and
Figure 3.11
As the middle class grows, income generated by the domestic absorption of manufacturing goods rises
25
20
15
10
–5
–30 –20 –10 0 10 20 30 40 50 60
Change in the share of middle class in total population (percentage points)
Note: All values are for the period 2001–2011. Income is in current $. Middle class is defined as the sum of middle and upper-middle classes in Kochhar (2015). Growth refers to the annual compound
growth rate of the period and income is proxied by domestic value added. Manufacturing sector classification is based on Annex C2, Table C2.2.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013) and Kochhar (2015).
74
“ The shift from basic
necessities to more sophisticated
manufactures sets in motion the
virtuous circle of consumption
Box 3.1
Measuring changes in the diversity of consumption patterns
3
The Gini-Simpson Index can be used to quantify the diver- Box Figure 2
sity of consumption by capturing the probability that two- Diversity of manufacturing consumption
dollars’ worth is spent on different goods. increases with a country’s industrialization level
Calculating the Gini-Simpson Index requires informa- 0.9
Gini-Simpson Index

tion about what and how much households consume. The
0.8
World Bank’s International Comparison Program provides
data for 174 countries at a highly disaggregated level (108
0.7
consumption items).
Of the 108 consumption items in the International 0.6
Comparison Program, 67 can be regarded as manufac-

0.5
tured goods. These items are grouped into nine broad
categories, based on their purpose. Box Figure 1 illus- 0.4
trates how countries at different stages of industrial
development allocated consumption of these categories 0.3
in 2011.
0.2
Based on this information, it is possible to calculate
the Gini-Simpson Index of each country’s basket of manu- 0.1
factured goods for 2011. Box Figure 2 shows a positive

0.0
correlation between a country’s degree of diversity in Least developed Other developing Emerging industrial Industrialized
countries economies economies economies
private consumption and its level of industrialization. The
same procedure can be used to calculate the Gini-Simp- Note: All values are for 2011. The Gini-Simpson index is calculated for the nine expenditure
categories of manufactured goods presented in Box Figure 1. Each bar shows the unweighted
son Index for 2005, and the absolute change between average of the indicator for the indicated country group. Industrialization level and manufacturing
consumption goods classifications are based on, respectively, Annex C1, Table C1.2 and Annex
both can be used as a proxy for the diversification of con-
C4, Table C4.1.
sumption baskets during the period. Source: UNIDO elaboration based on the 2011 International Comparison Program dataset
(World Bank 2015).
Box Figure 1
Higher industrialization levels associated with a smaller share of food in the household budget
and a higher share of vehicles and recreational goods
Industrialized
economies
Emerging
industrial
economies
Other
developing
economies
Least
developed
countries
0 25 50 75 100
Percent
Food and non-alcoholic beverages Furnishings, household equipment and routine Purchase of vehicles Audio-visual, photographic and information
Alcoholic beverages, tobacco and narcotics household maintenance (including services) Telephone and telefax processing equipment (including services)
Clothing and footwear (including services) Medical products, appliances and equipment equipment Miscellaneous goods and services
Note: All values are for 2011 and are in current PPP$ (PPP is purchasing power parity). Industrialization level and manufacturing consumption goods classifications are based on, respectively, Annex
C1, Table C1.2 and Annex C4, Table C4.1.
Source: UNIDO elaboration based on the 2011 International Comparison Program dataset (World Bank 2015).
75
“ Exploiting the opportunities
created by a larger middle class
requires industrial capabilities
that allow domestic producers to
serve higher domestic demand
3 significant (Figure 3.12). Countries that diversified

their consumption baskets the most between 2005
Countries that at the beginning of the period
of high domestic demand growth (the early 2000s)
and 2011 tended to have the fastest annual growth ranked above the world median were more successful
rates of DVA MADA . in capturing incomes from the expansion of the mid-
dle class, the increase in real wages and the diversifi-

The importance of strong industrial cation of demand, compared with countries that are
capabilities ranked below the median rank. The positive relation-
Exploiting the opportunities created by a larger ship observed in Figures 3.10–3.12 is much stronger
middle class, higher wages and the diversification for countries with high CIP rankings (Figure 3.13).
of domestic consumption requires industrial capa- It is particularly clear in the cases of real wage growth
bilities that allow domestic producers to serve higher (panel c) and diversification of consumption (panel e).
domestic demand. One way of assessing the industrial A precondition for the circle to work is a mini-
competitiveness of countries is by looking at their mum level of domestic industrial capabilities. Without
relative position on UNIDO’s Competitive Industrial such capabilities, domestic demand will tend to leak
Performance (CIP) index (see Chapter 8 for details). towards consumption of foreign goods, particularly
This index captures the ability of countries to produce for new varieties of goods. There appears to be little
and export manufactures competitively, and achieve relationship between consumption diversification
structural transformation. It allows countries to and the creation of incomes from domestic demand
benchmark the performance of their manufacturing in countries with low CIP indexes at the beginning of
sectors against that of other countries. the period, probably because demand for new varieties
Figure 3.12
Incomes generated by domestic absorption of manufacturing goods are larger when consumption
becomes more diversified
25
20
15
10
–5
–0.3 –0.2 –0.1 0.0 0.1 0.2 0.3
Diversification of private household consumption of manufacturing goods
Note: All values are for the period 2005–2011. Income is in current $. Diversification in consumption is defined as the absolute change in the Gini-Simpson index of manufacturing consumption
categories between years 2005 and 2011. See Box 3.1 for details. Growth refers to the annual compound growth rate of the period and income is proxied by domestic value added. Manufacturing
consumption goods and manufacturing sector classifications are based on, respectively, Annex C4, Table C4.1 and Annex C2, Table C2.2.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013) and the 2005 and 2011 International Comparison Program dataset (World
Bank 2008 and 2015).
76
“ A precondition for the circle
to work is a minimum level of
domestic industrial capabilities
Figure 3.13
High industrial capabilities are needed to benefit from middle class expansion, real wages gains and 3
diversification of domestic consumption
Expansion of the middle class Growth in real wages Diversification of domestic consumption

a. Countries above median rank of the CIP index c. Countries above median rank of the CIP index e. Countries above median rank of the CIP index
25 25 25
20 20 20
15 15 15
10 10 10
5 5 5
0 0 0
–5 –5 –5
–40 –20 0 20 40 60 –10 –5 0 5 10 –0.2 –0.1 0.0 0.1 0.2 0.3
b. Countries below median rank of the CIP index d. Countries below median rank of the CIP index f. Countries below median rank of the CIP index
25 25 25
20 20 20
15 15 15
10 10 10
5 5 5
0 0 0
–5 –5 –5
–10 0 10 20 30 –10 0 10 20 –0.3 –0.2 –0.1 0.0 0.1 0.2 0.3
Note: All values are for the period 2001–2011 in panels a, b, c and d, and for the period 2005–2011 in panels e and f. Income is in current $ and wages in 2011 PPP$ (PPP is purchasing power parity).
GDP is gross domestic product. Income growth generated by domestic demand is estimated following the approach proposed in de Macedo and Lavopa (2017). Growth refers to the annual compound
growth rate of the period and income is proxied by domestic value added. See Chapter 8 for details regarding the calculation and analysis of UNIDO’s Competitive Industrial Performance (CIP) index. In
the case of consumption diversification, because the measure used refers to 2005–2011, countries are split according to the CIP ranking in 2005. In all other cases, countries are split according to the
CIP ranking in 2001. Manufacturing sector classification is based on Annex C2, Table C2.2.
Source: UNIDO elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013), the 2005 and 2011 International Comparison Program dataset (World Bank
2008 and 2015), Penn World Table 9.0 (Feenstra et al. 2016) and Kochhar (2015).
of goods could not be sourced locally and therefore earners spend their incomes on consumption items.
tended to create incomes elsewhere. The pattern of spending depends on the level of
income, which can change by the working of the circle
Second-order multiplier effects (if, for example, an initial increase in demand stimu-
The figures presented so far have looked only at the lated sufficient income generation to move some con-
direct and indirect creation of incomes triggered by sumers from one income segment to the next and alter
the final absorption of manufactured goods. They do their consumption patterns in line with the Engel
not consider the induced channel of demand-driven dynamics described in Chapter 2).
income creation—that is, the incomes created by A simple way of capturing these effects is to “close”
second-order multiplier effects when part of the value the input-output model by making wages and final
added generated is spent on additional consumption household consumption endogenous—that is, assum-
of goods and services. ing that all wages are re-spent on consumer goods
It is difficult to capture these second-order effects, following the same (average) consumption pattern
because they depend on the way wage and profit observed in the year of analysis (this type of multiplier
77
“ Many factors affect the size of the
multipliers, but wages appear key
3 is known as a Leontief type-II multiplier). Applying

this technique to the same sample of countries con-
Figure 3.14
Multiplier effects of private consumption of
manufacturing goods across industrialization
sidered so far and using the Eora Multi-Region Input- levels
Output database, Haider (2017) finds that these

1.4
Multiplier effect of private household consumption of manufacturing goods

effects can be very significant. In 2013, for example,
the induced effect is almost as large as the direct and 1.2
indirect effect. It is apparent in all country groups,

1.0
although it seems larger in industrialized economies.
Taking into account all three effects, the average mul-
0.8
tiplier effect of domestic manufacturing consump-
tion is about 1.20. It is largest in LDCs and emerging 0.6
industrial economies (Figure 3.14).
Many factors affect the size of the multipliers, but 0.4
wages appear to be key: The relationship between the

size of the multiplier and the share of labour compen- 0.2
sation in GDP is positive and significant (Figure 3.15).

0.0
Industrialized Emerging Other Least
economies industrial developing developed
Income creation and social inclusiveness economies economies countries
When sufficient industrial capabilities are in place, Direct and indirect effect Induced effect
the circle of manufacturing consumption generates Note: All values are for 2013. The figure presents estimates based on 127 countries.
Industrialization level classification is based on Annex C1, Table C1.2.
income continuously, either in a direct fashion—in Source: UNIDO elaboration based on calculations by Haider (2017) derived from the
Eora Multi‑Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013).
the form of wages and profits—or indirectly, through
Figure 3.15
Higher wage shares in GDP accompanied by bigger multiplier effect of household manufacturing
consumption
3.0
Multiplier effect of private household consumption of manufacturing goods
2.5
2.0
1.5
1.0
0.5
0.0
0 5 10 15 20 25 30 35
Share of wages in GDP (percent)
Note: All values are for 2013. Wages are in current $. GDP is gross domestic product. Manufacturing sector classification is based on Annex C2, Table C2.2.
Source: UNIDO elaboration based on calculations by Haider (2017) derived from the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013).
78
“ Social inclusiveness requires that
such incomes flow to the poorest
in society, increasing welfare
at the bottom of the pyramid
forward and backward linkages. Such incomes are

re-spent, further raising household consumption and
food (Baffes and Dennis 2013, Foster-McGregor et al.
2017b). The substantial relative price increase of alco-
3
generating economy-wide increases in income and holic beverages and tobacco may reflect increases in
demand (Haider 2017). excise taxes.

Social inclusiveness—the generation of equal In all countries considered, the prices for non-food
opportunities to contribute to, and benefit from manufactured products either decreased or increased
industrial development—requires that such incomes more slowly than the overall price.13 Exceptions
flow to the poorest in society, increasing welfare at the include France, the United States, Mexico, South
bottom of the pyramid. It also requires the removal of Africa (where prices of medical products appear to
constraints to participation in the market for women, have increased relative to the prices of all other goods
youth, persons with disabilities, members of minority and services) and Japan (where prices of private vehi-
groups and others belonging to marginalized groups. cles experienced a slight increase relative to the rest of
Government can help steer domestic consumption the economy).
towards goods characterized by positive social impact. The prices of all other durable and semi-durable
Examples include quotas in strategic public procure- consumer goods either decreased or rose at a slower
ment for women-led enterprises, or preferential access than average pace. The most remarkable trend is in
and capacity building to social enterprises and SMEs, communication and information-processing goods.14
as discussed in greater detail in Chapter 6. In both industrial and developing economies, prices
for durable high-tech goods such as mobile phones,
Domestic prices and purchasing power audio-visual equipment and personal comput-
Prices are one of the key channels through which ers declined markedly over the past two decades.15
changes in productivity translate into real income Industries in which technological progress was
gains (or losses) for consumers (see Chapters 1 and marked also experienced slower prices increases (see
2). All other things equal, when productivity in an Chapter 2).
industry increases, production costs decrease. If firms Trade is another important driver of movements
in the industry face competition in product markets, in relative prices. It can affect the relative prices of
output prices decline. If these conditions are in place, goods and services directly, by influencing import
increases in productivity are passed on to consumers prices. Over time, prices in sectors that are more heav-
through lower prices. ily traded, such as manufacturing, may therefore grow
The prices of manufactured goods tend to increase at a slower rate— or experience a more significant
more slowly than the prices of services and other goods. decline—than prices of services.
Price trends in different industries also differ widely. Indirect effects are also important. The increased
Figures 3.16 and 3.17 display the changes (in competition on product markets associated with
absolute values) in relative prices between 2003 and openness to trade, for instance, is likely to reduce the
2015. In most of the industrialized and developing mark-ups of domestic producers (Pain et al. 2008). The
economies considered, manufactured food products increased availability of cheaper intermediate inputs
experienced the greatest relative increase in prices.12 may also induce price moderation, in both domesti-
The relative price increase for manufactured food cally produced and imported goods.
and beverage products appears to be much larger in Tables 3.1 and 3.2 show the proportion of final
developing economies than in industrial ones. This household consumption satisfied by imports for a
finding may partly reflect the impact of the sustained set of manufacturing industries that are similar to
boom in commodity markets of the mid-2000s, which the consumption categories considered in Figures
markedly increased prices for all resources, including 3.16 and 3.17. Import penetration ratios vary across
79
“ The prices of manufactured
goods tend to increase more
slowly than the prices of
services and other goods
3 Figure 3.16
Large drops in relative prices of communication and information processing goods across selected
industrialized economies
Germany France
Audio-visual, photographic Audio-visual, photographic

and information processing and information processing
equipment (including services) equipment (including services)
Telephone and Telephone and

telefax equipment telefax equipment
Purchase of Purchase of
vehicles vehicles
Medical products, Medical products,

appliances and equipment appliances and equipment
Furnishings, household Furnishings, household
equipment and routine equipment and routine
household maintenance household maintenance
(including services) (including services)
Clothing and footwear Clothing and footwear
Alcoholic beverages, Alcoholic beverages,

tobacco and narcotics tobacco and narcotics
Food and non-alcoholic Food and non-alcoholic

beverages beverages
–1.0 –0.5 0.0 0.5 –1.0 –0.5 0.0 0.5

Absolute change in relative price Absolute change in relative price
Japan United States


vehicles vehicles



beverages beverages
–1.0 –0.5 0.0 0.5 –1.0 –0.5 0.0 0.5

Note: All values are for the period 2003–2015. Absolute change in relative prices is estimated as the difference between the change in the aggregate consumer price index and the change in the
corresponding consumption category during the period, normalized by the aggregate change. Manufacturing consumption goods classification is based on Annex C4, Table C4.1 (including additionally
services where indicated in the legend). When countries report data in a different classification, the closest set of goods has been used.
Source: UNIDO elaboration based on Eurostat (2016), United States Bureau of Labor Statistics and Japan Statistics Bureau, Ministry of Internal Affairs and Communications website (www.stat.go.jp/
english/data/cpi/1588.htm#his).
country groups. They are higher in industrialized In industrialized economies, demand for clothing
economies than in emerging industrial economies. products appears to be satisfied largely by imports;
Differences are particularly marked in certain indus- in emerging industrial economies, consumption in
tries, such as textile products, leather and footwear. this category appears to be predominantly domestic.
80
“ Industries in which technological
progress was marked also
experienced slower prices increases
Figure 3.17
Widespread reductions in relative prices across all key manufacturing categories but food and 3
beverages in selected developing economies
China Mexico


vehicles vehicles



beverages beverages
–1.0 –0.5 0.0 0.5 1.0 –1.0 –0.5 0.0 0.5

South Africa Turkey


vehicles vehicles



beverages beverages
–1.0 –0.5 0.0 0.5 –1.0 –0.5 0.0 0.5 1.0

Note: All values are for the period 2003–2015. Absolute change in relative prices is estimated as the difference between the change in the aggregate consumer price index and the change in the
corresponding consumption category during the period, normalized by the aggregate change. Manufacturing consumption goods classification is based on Annex C4, Table C4.1 (including additionally
services where indicated in the legend). When countries report data in a different classification, the closest set of goods has been used.
Source: UNIDO elaboration based on National Bureau of Statistics China (2016b), National Institute of Statistics and Geography of Mexico, Price Indices 2017, Statistics South Africa (2017) and
Eurostat (2016).
These results are consistent with the earlier find- Substantial differences are evident across sectors.
ing that imports are more important in industrial- Industries in which consumption is more heavily
ized economies than in other country groups (see directed towards imports are computer, electronic and
Figure 3.4). optical equipment and motor vehicles. In all country
81
“ Imported goods are more
important in product categories in
which prices experienced the slowest
growth over the past two decades
3 Table 3.1
Import penetration ratios for various final household consumption categories in selected
industrialized economies, 2000 and 2011, and the change in this period
France Germany Japan United States

Change Change Change Change

2000 2011 (percentage 2000 2011 (percentage 2000 2011 (percentage 2000 2011 (percentage
(percent) (percent) points) (percent) (percent) points) (percent) (percent) points) (percent) (percent) points)
Food products,
beverages and
tobacco 14.4 18.8 4.4 15.1 18.1 3.0 7.3 10.1 2.8 5.4 7.6 2.1
Textiles, textile
products, leather
and footwear 47.5 80.7 33.2 60.0 65.5 5.5 24.1 49.5 25.4 36.3 65.4 29.1
Wood and
products of wood
and cork 22.6 26.3 3.7 18.2 17.0 –1.2 20.1 27.0 6.9 16.1 15.1 –1.0
Chemicals and
chemical products
(including
pharmaceutical) 39.0 50.0 11.0 33.5 50.2 16.7 7.9 13.7 5.8 16.0 23.4 7.4
Electrical
machinery and
apparatus, n.e.c. 30.5 45.8 15.3 15.4 27.1 11.7 12.9 32.3 19.3 33.1 47.9 14.9
Motor vehicles,
trailers and
semi-trailers 36.0 42.8 6.8 24.3 24.4 0.2 2.9 3.3 0.4 28.7 34.7 6.0
Computer,
electronic and
optical equipment 56.9 70.0 13.1 56.8 48.2 –8.6 17.1 27.4 10.3 38.3 59.1 20.8
Note: Industry group classification is based on Annex C2, Table C2.3; n.e.c. is not elsewhere classified.
Source: UNIDO elaboration based on OECD (2017c), “Inter-Country Input-Output Tables, 2016 edition,” oe.cd/icio, (accessed on September 6, 2017).
groups, the share of imports is lowest for food prod- Recent studies of the impact of import penetra-
ucts, beverages and tobacco and wood and products of tion on domestic price indexes in other industrialized
wood and cork (3–30 percent). economies provide further evidence in support of this
Imported goods are more important in prod- trend. A study of the United States, for instance, finds
uct categories in which prices experienced the slow- that greater imports from China following its 2001
est growth over the past two decades. It is unclear accession to the World Trade Organization (WTO)
whether and to what extent trade may influence price lowered the United States’ manufacturing price index
dynamics in countries such as China, where import by 7.6 percent between 2000 and 2006, after correct-
penetration ratios are low for all industries under ing for overall inflation in domestic and import prices
consideration. In the European Union, Japan, South (Amiti et al. 2017). Consumers gain from Chinese
Africa and the United States, it is plausible that the imports largely because of their impact on competi-
greater trade integration of emerging industrial econ- tor prices and variety.16 In Japan and South Africa,
omies in world trade has dampened consumer price greater imports from China seem to have contributed
inflation. The European Central Bank (2006) finds to lower price growth thanks to greater variety and
that greater trade with China and other lower-cost increased competitive pressures on domestic produc-
economies lowered annual import price growth in ers (see Edwards and Jenkins 2015 on South Africa,
the euro zone by an average of 2 percentage points and Weinstein and Broda 2008 on Japan). The impact
between 1996 and 2005, depressing the growth of appears to have been more moderate than in the
domestic prices. United States or the European Union, however.
82
“ Changes in relative prices
are likely to have different
impacts at different levels of
the income distribution
Table 3.2
Import penetration ratios for various final household consumption categories in selected developing 3
countries, 2000 and 2011, and the change in this period
China Mexico South Africa Turkey

Change Change Change Change
2000 2011 (percentage 2000 2011 (percentage 2000 2011 (percentage 2000 2011 (percentage
(percent) (percent) points) (percent) (percent) points) (percent) (percent) points) (percent) (percent) points)
Food products,
beverages and
tobacco 2.6 2.7 0.1 6.0 9.4 3.4 5.6 9.9 4.3 4.2 4.0 –0.2
Textiles, textile
products, leather
and footwear 5.9 2.6 –3.3 29.4 30.1 0.7 16.0 20.3 4.3 9.6 9.1 –0.5
Wood and
products of wood
and cork 10.9 2.0 –8.9 17.5 25.0 7.5 24.4 17.2 –7.2 14.2 10.3 –3.9
Chemicals and
chemical products
(including
pharmaceutical) 13.5 13.5 0.0 30.6 41.1 10.6 41.8 53.9 12.0 35.3 31.8 –3.5
Electrical
machinery and
apparatus, n.e.c. 8.4 7.2 –1.2 98.3 67.2 –31.1 34.3 33.6 –0.8 31.5 15.6 –15.9
Motor vehicles,
trailers and
semi-trailers 5.4 7.7 2.3 46.3 58.0 11.7 22.8 62.0 39.2 38.3 36.6 –1.7
Computer,
electronic and
optical equipment 25.8 29.8 4.0 47.6 67.2 19.6 97.6 81.2 –16.3 65.3 62.4 –2.9
Note: Industry group classification is based on Annex C2, Table C2.3. N.e.c. is not elsewhere classified.
Source: UNIDO elaboration based on OECD (2017c), “Inter-Country Input-Output Tables, 2016 edition,” oe.cd/icio,(accessed on September 6, 2017).
For a host of demographic, cultural and economic divide the population into consumption quartiles (see
reasons, expenditures on different categories of goods Chapter 2).
vary widely across consumers. Because consumers Considerable differences in consumption patterns
belonging to different income segments exhibit very are evident across income groups (Figure 3.18 and
different consumption patterns, changes in relative Figure 3.19). These patterns appear to be consistent
prices are likely to have different impacts at different with findings on structural transformation: As income
levels of the income distribution. A fall in the relative rises, the falling importance of agriculture is reflected
price of goods consumed more by the poor may result in a fall in the consumption expenditure share in food
in a reduction in the real income gap between the rich categories (Duarte 2017). The opposite holds true for
and poor. A decrease in the relative price of goods expenditure on durable goods and services.
consumed more by higher-income households would Broad consumption patterns appear to be similar
increase real income inequality. in the two groups of countries. Expenditure on infor-
Information from household surveys can shed mation-processing and communication equipment
light on differences in consumption patterns. (personal computers and mobile phones) is an excep-
Information on countries in the European Union tion. In the European Union households in all income
comes from Eurostat, which divides the population quintiles appear to allocate roughly equivalent shares
into income quintiles. Information on emerging to the two categories. By contrast, in developing coun-
industrial and developing economies comes from the tries, consumption of these items increases markedly
World Bank’s Global Consumption Database, which with income.
83
“ Domestic demand for final
manufactured goods can be
a powerful driver of income
creation in emerging industrial
and developing economies
3 Figure 3.18
Diversity of manufacturing consumption increases with average incomes across emerging industrial
and developing economies…
Lowest
Low
Middle
Higher
0 25 50 75 100
Percent
Food and non-alcoholic beverages Clothing and footwear (including services) Medical products, appliances Telephone and telefax equipment
Alcoholic beverages, tobacco and narcotics Furnishings, household equipment and routine and equipment Audio-visual, photographic and information
household maintenance (including services) Purchase of vehicles processing equipment (including services)
Note: All values are for 2010. Average values are in current local currency units for the 88 developing countries included in the database. Income level classification is based on the income ranges defined
by the Global Consumption Database (see Chapter 2, Figure 2.2) and manufacturing consumption goods classification is based on Annex C4, Table C4.1 (including additional services where indicated in
the legend).
Source: UNIDO elaboration based on the Global Consumption Database (World Bank 2014).
Given these differences in consumption patterns economies, where food prices were stable, than in
across income segments, as well as across countries, developing ones.
movements in relative prices may have different dis- The distributional consequences of trade-related
tributional effects. In all country groups the prices of changes in relative prices may also differ according to
non-food manufactured goods grew at a slower pace country of residence. The empirical literature provides
than the prices of primary commodities, energy and support to the notion that trade liberalization has
services. This change benefited lower- and middle- a pro-poor bias in industrialized economies (Amiti
income segments of society more than higher-income et al. 2017, Broda and Romalis 2008).17 Evidence on
groups, because they allocate a large share of their the impact of changes in relative prices in low- and
expenditures to manufactured products (richer con- middle-income countries is scarce.18 A sizable body of
sumers spend more on services). empirical literature documents the impact of trade in
The prices of manufactured food products dis- low- and middle-income countries through the earn-
play a marked increase, especially in emerging and ings channel.19 The price channel has received less
developing economies (see Figure 3.17). As a result, scrutiny. Further research is required.
lower-income consumers—who spend more on food
than on semi-durable and durable manufactured Policies to foster domestic demand
goods—may have experienced relative welfare losses. and industrial development
Movements in relative prices may have resulted in Domestic demand for final manufactured goods
greater relative gains for the poor in industrialized can be a powerful driver of income creation in
84
“ Policy‑makers can accommodate
production structures and other
complementary institutions
in line with expected shifts
in domestic demand
Figure 3.19
…and industrialized economies as well 3

1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
0 25 50 75 100
Percent
Food and non-alcoholic beverages Clothing and footwear (including services) Medical products, appliances Telephone and telefax equipment
Alcoholic beverages, tobacco and narcotics Furnishings, household equipment and routine and equipment Audio-visual, photographic and information
household maintenance (including services) Purchase of vehicles processing equipment (including services)
Note: All values are for 2010. Average values are in local currency units for the 28 countries in the European Union. Manufacturing consumption goods classification is based on Annex C4, Table C4.1
(including additional services where indicated in the legend).
Source: UNIDO elaboration based on Eurostat (2016).
emerging industrial and developing economies Policy-makers may have little control over the evo-
—a nd its importance appears to be increasing. lution of domestic demand, but they are in a position
Domestic absorption of manufacturing goods has to accommodate production structures and other com-
raised income in all country groups, with the par- plementary institutions in line with expected shifts in
tial exception of industrialized economies. Recent it. The opportunity represented by the emergence of
global trends—notably, weaker growth in countries a new group of consumers in a host of large emerg-
in the Organisation for Economic Co-operation ing industrial economies is a case in point. Facilitated
and Development (OECD) and the increase in by the self-reinforcing circle of price and market-size
the size of the middle class in many emerging dynamics, the expansion of a domestic middle class is
industrial economies—partly explain the growing accompanied by different sets of consumer preferences
impact of domestic demand in driving growth and and spending patterns. Firms in emerging economies
industrialization. may be better placed than established market lead-
The drivers of domestic demand discussed in this ers in industrialized economies to take advantage of
chapter are hardly amenable to government action. these new sources of demand (Lee and Malerba 2017).
The emergence of a salaried consumer class, shifts in a Location as well as market knowledge advantages can
country’s demographic structure and the distribution work in their favour.
of income are all factors that play out over the very In the context of a growing internal market for
long run. Domestic demand can be understood pri- goods and services, governments can act as facilitators
marily as a framework condition for industrialization, and partners in strengthening domestic productive
as discussed in Chapter 6. capabilities. Policy intervention may be required, for
85
“ Complementary measures can
be introduced to ensure healthy
growth in domestic demand
3 instance, to correct market failures. Industrial policy

measures are warranted to lower the risks associated
Over the medium to long run, changes to the institu-
tional environment may be required. They can include
with innovation and ensure that domestic firms can labour market reforms and the establishment (or
take advantage of the asymmetric learning opportuni- strengthening) of social protection systems. 20 Such
ties involved in the use of new technologies. Incentives reforms should seek to support wage growth and
for domestic producers can contribute significantly ensure that risks faced by households are pooled more
to the acquisition of capabilities and accelerate learn- widely, thereby reducing incentives for precautionary
ing (Stiglitz and Greenwald 2014, UNIDO 2013, savings and encouraging private consumption.
UNIDO 2015b). A strategy focused on rebalancing a country’s
The evidence surveyed in this chapter suggests that industrialization pattern towards domestic con-
as countries grow richer, they become more integrated sumption is likely to encounter multiple challenges.
with the global economy. The growth in imports for Several factors can determine whether a domestic
domestic consumption, which accompanies processes demand-oriented strategy works. They include the
of global integration, requires greater availability of size of a country’s domestic market; the distribution
foreign exchange. In the absence of robust export of income; and the extent to which national income
growth, movements towards rebalancing risk running leaks towards the consumption of imports or savings
into balance-of-payments difficulties (UNCTAD (Mayer 2016).
2013b). Countries should therefore simultaneously Not all countries face equivalent framework con-
adapt trade, exchange rate and industrial policy ditions. Government interventions to accommodate
instruments to tap foreign—a s well as domestic— shifts in domestic demand will hinge on a variety of
sources of demand (see Chapters 4 and 6). factors, ranging from a country’s level of income and
Industrial and trade policy instruments should industrialization to its factor endowment. In an LDC,
be used only temporarily and based on performance for example, where the majority of workers are in the
(UNIDO 2013). The introduction of industrial policy rural economy or the informal economy, governments
instruments—especially subsidies, tariffs and non-tar- can partner with the private sector and international
iff barriers to trade—is likely to lead to a gap between organizations to stimulate growth in agricultural
international and domestic prices. Policy-induced productivity.
increases in the cost of living will probably reduce the Policy interventions can steer demand in a more
welfare of lower- and middle-income segments of soci- sustainable or inclusive direction. A host of regulatory
ety, with potentially damaging consequences on con- interventions—ranging from price-based measures to
sumption patterns. behavioural nudges—can incentivize changes in con-
Complementary measures can be introduced to sumers’ spending patterns or steer investors in direc-
ensure healthy growth in domestic demand. Over tions they may not have taken without regulation.
the short term, governments can employ fiscal tools Governments can adopt green and inclusive public
to encourage an increase in household consumption. procurement policies (see Chapter 6).
86
Notes
1. The terms “domestic demand” and “domestic Multi-Fibre Arrangement incentivized estab-
3
absorption” are used interchangeably throughout lished garment producers in emerging industrial
the report to refer to the demand that takes place economies to transfer capital and technologies

inside the domestic economy and comprises pri- to countries such as Bangladesh in order to con-
vate household consumption, gross capital forma- tinue serving industrialized economies’ markets.
tion and final consumption by governments and Foreign know-how and strong government sup-
non-profit institutions (see Box 1.1 in Chapter 1). port to the industry facilitated its success (see
2. Available evidence confirms that a strong, posi- Khan 2011). More recently, Ethiopia has devel-
tive relationship exists between importing and oped a highly competitive floriculture indus-
firm productivity. While the majority of studies try, becoming Africa’s second-largest cut-flower
focus on industrialized economies, the beneficial exporter (after Kenya). As it did in Bangladesh,
impact of importing seems to apply to develop- foreign investment played a major role in the
ing country firms as well. Recent research pro- industry’s development, by facilitating technol-
vides evidence that importers across Sub-Saharan ogy spillovers and acting as a conduit for pen-
Africa do perform better relative to non-import- etration into international markets (Iizuka and
ers, provided that importing firms have appropri- Gebreeyesus 2017). Continued government sup-
ate levels of human capital (Foster-McGregor et port to overcome infrastructural bottlenecks
al. 2013). and failures in markets for labour, land and capi-
3. The Eora Multi-Region Input-Output database tal also proved crucial for the industry’s success
provides harmonized input-output and trade (Oqubay 2015).
information for 187 countries for 1990–2013. 5. See Johnson (2014) and Los et al. (2015) for over-
The estimations in this chapter focus on econo- views of this literature.
mies with populations of at least 500,000 in 6. This absorption can be by households (private
2013. Within this broad group some economies consumption), the government (public consump-
were excluded due to inconsistencies with other tion) or private enterprises (investment).
data sources in the composition of final demand 7. See de Macedo and Lavopa (2017) for an explana-
reported by Eora. The sample finally used covers tion of the approach.
127 countries, including 38 industrialized econo- 8. Consider, for instance, private household con-
mies, 26 emerging industrial economies, 25 LDCs sumption of automobiles. To produce automo-
and 38 other developing economies. biles, the car manufacturing industry will plau-
4. Several export success stories in LDCs sup- sibly contribute most of the value generated. Yet
port this notion. Bangladesh’s garment industry other sectors of the economy—such as mining, or
emerged in the late 1970s as a result of a joint services—will also contribute by providing pri-
venture between domestic entrepreneurs and the mary inputs for the production of steel, plastics,
multinational company Daewoo, in the context aluminum or rubber that will be used in the car’s
of the Multi-Fibre Arrangement. Approved under production, and the logistics and commercializa-
the auspices of the General Agreement on Tariffs tion of the car.
and Trade (GATT) in 1974, the Multi-Fibre 9. Globally, the annual compound growth rate of
Arrangement set bilaterally negotiated quotas on the GDP deflator jumped from 1.1 percent in
textile and clothing exports from developing to 1990–2000 to 4.3 percent in 2000–2013, accord-
industrialized countries. As quotas did not cover ing to the United Nations National Accounts
LDCs that did not have a garment industry, the Main Aggregates Database (UNSD 2016b).
87
3 10. The definition of middle-income status adopted
by Kochhar (2015) is roughly comparable with
et al. (2013) find that expansion of trade with
China reduced the relative wages of employ-
that employed in the Global Consumption ees of firms and sectors that were more directly
Database, which sets the middle-income thresh- exposed to foreign competition in the United
old at $8.44–$23.03 daily per capita consump- States. Acemoglu et al. (2016) estimate that
tion (see Chapter 2). China’s export growth reduced overall employ-
11. The geographical distribution of middle-class ment growth in United States’ manufacturing
growth over the past decade was highly hetero- industries. Bloom et al. (2016) find that trade-
geneous. According to Kochhar (2015), China, induced technical change led to the reallocation
followed by South America and Eastern Europe, of employment towards more technologically
witnessed the largest increases. advanced firms in the European Union, resulting
12. The countries considered include a set of upper- in a decrease in manufacturing employment, espe-
middle-income economies from various regions cially among low-skill workers.
(China, Mexico, South Africa and Turkey) and 17. The welfare impact of trade liberalization through
four of the largest industrialized economies the earnings channel appears more ambiguous.
(France, Germany, Japan and the United States). See note 16 above.
13. Manufactured goods are categorized according 18. A notable exception is work on the distributional
to their purpose, in line with the classification of effects of trade liberalization in Mexico. A study
individual consumption by purpose (COICOP), of the impact of the North American Free Trade
as employed by the International Comparisons Agreement (NAFTA) on urban consumers from
Programme (see Annex C4, Table C4.1 for a different income segments estimates that access
comprehensive list of all products in the catego- to cheaper imported intermediate inputs sourced
ries). Because the categories do not match exactly from the United States reduced the relative price
across countries, the comparisons should be taken of higher-quality products sold in Mexico, exacer-
only as indicative of the most important trends. bating inequality (Faber 2012).
14. In Mexico information-processing equipment is 19. See Goldberg and Pavcnik (2007) for a compre-
bundled with other electronic equipment rather hensive review of issues treated in this strand of
than with recreational items. In the United the literature.
States, where the Bureau of Labor Statistics pro- 20. Carefully designed minimum wage legislation
vides price data for more disaggregated product can increase income from labour without nec-
categories, personal computers were selected as essarily affecting employment rates (Card and
the most representative category for the broader Krueger 1994, Schmitt 2013). Labour market
“information-processing and recreational goods” interventions can, however, increase inflationary
grouping. pressures and should therefore be accompanied
15. In Japan and Mexico, prices of these products are by appropriate monetary policy. The introduction
bundled with prices for communication services, of complementary institutions, such as collective
which probably explains the lower decline in these representation mechanisms, can also stimulate
countries. In South Africa the relative price for wage growth and increase job security. Data on
2003 includes postal services. collective bargaining in low- and middle-income
16. Amiti et al. (2017) focus on consumer welfare. countries are limited, but it seems to be associated
Greater trade with China also appears to affect with higher wages, lower wage dispersion and
industrialized economies in other respects. Autor greater training opportunities (Freeman 2009).
88
Chapter 4
Capturing incomes from global

Global demand, income creation and that the terms of trade of countries that produce homo-
industrial development geneous products—or more generally its international
Global demand for domestic goods helps drive eco- purchasing power—will deteriorate, whether output
nomic development, mainly through its impact on the expands thanks to technical change or factor accumu-
economic growth process.1 lation (Acemoglu and Ventura 2002, Dornbusch et al.
This chapter examines the global channels that 1977). All else equal, to sell additional output on world
lead to income creation along the virtuous circle markets, countries must lower their export prices.
detailed in Chapters 1 and 2. Global demand for A price-driven expansion of exports generates new
domestic manufacturing products is a critical vehicle incomes at home, where price effects can also have a
for promoting industrial development and growth. positive impact on the disposable incomes of consum-
Catering to global demand for one’s products pro- ers. But the country will have to export more and
vides new incomes to local producers, which can fuel more to import the same volume of commodities and
the virtuous circle of manufacturing consumption. services. This effect can be significant and intensify,
Moreover, it provides the foreign exchange required as imports tend to increase as domestic incomes rise
to purchase imported goods and avoid running into (as seen in Chapter 3). It can happen when prices of
balance-of-payments problems. imported goods rise because of increases in domestic
The extent to which these opportunities materialize or global demand. A 10 percent decrease in the terms
depends largely on the relationship between the value of of trade as a result of lower export prices or higher
manufacturing exports and the price of imports. A meas- import prices lowers the international purchasing
ure that captures this relationship is the manufacturing power of a country by the same magnitude.
income terms of trade (MITT). The MITT reflects the Generally, price effects depend on how exports
“purchasing power” of manufacturing exports—how react to global increases in income (the foreign income
much a country can import using the income generated elasticity for domestic products); how imports react to
by the exports of its manufacturing sector. a domestic increase in income (the domestic income
The analysis of the chapter shows that increases elasticity for foreign products); how the demand for
in the purchasing power of exports of manufacturing domestic goods reacts to price changes (price elastic-
goods are positively correlated with income growth. ity); the domestic conditions on the supply side in
Since several factors affect the purchasing power terms of factor conditions; and the variety of prod-
of manufacturing exports, however, the relation- ucts a country exports. The complex interplay among
ship between global demand for domestic goods and these factors, and the potentially detrimental effects of
domestic incomes is not unidirectional. The three declining terms of trade on a country’s welfare, are a
effects introduced in the virtuous circle diagram— key concern in analysing the functioning of the virtu-
variety, volume and price— crucially mediate the ous circle of manufacturing consumption and indus-
interplay between the two sides. trial development in a globalized economy.
The evidence that the growth of export volumes and
domestic incomes are closely correlated is undisputed. A quick review of the debate on the
Volume and price effects are, however, linked and must impact of manufacturing exports and
be analysed together, as changes in export volumes are development
related to changes in prices and vice versa: If export A long research tradition stretching back to the
volumes expand, international trade theory postulates 1950s has tried to establish the effects of injections of
89
“ Catering to global demand
provides new incomes to
local producers, which can
fuel the virtuous circle of
4 demand from abroad on domestic income generation.

Traditionally, it has been difficult to establish a clear-
diversify their export portfolios into manufacturing
products to boost their export earnings and improve
cut causal link, as cross-country studies have been, and their terms of trade. The assumption was that income
remain, plagued by empirical issues and have often elasticities are generally more favourable for manufac-
Capturing incomes from global demand for manufacturing
examined the question only indirectly, via the effects tured products than for primary commodities.
of policy-induced barriers to international trade. As a raft of developing countries, mainly in Asia
The Prebisch-Singer hypothesis is one of the first and Latin America, experienced rapid growth in man-
theories that links the reaction of domestic exports to ufacturing exports, new concerns have surfaced that
global increases in income and developments in global the types of manufacturing products these countries
prices. It postulates that if the exports of a country are export share some of the disadvantages of primary
either greatly inferior or basic products—that is, the products relative to manufacturing goods. This point
quantity demanded of these products globally declines has been made especially in the “fallacy of composi-
as global incomes increase—domestic producers will tion” literature (see e.g., Mayer 2003), which has led to
be forced to continually lower their export prices to a “modified” Prebisch-Singer hypothesis (lower part of
sell their output abroad.2 Figure 4.1).
The classical hypothesis traditionally considers The modified hypothesis starts from the observa-
primary products (unprocessed products from min- tion that developing and emerging industrial econo-
ing, forestry, fisheries or agriculture) as belonging to mies differ from industrialized economies in their
this category; it considers manufactured products as technological capacity, institutional settings, labour
superior products. Export prices of primary products markets and so on. Their manufacturing products
will also be negatively affected if markets are competi- therefore tend not to be technology intensive but
tive and producers must pass on a larger share of gains labour intensive and easily imitated by other market
from productivity growth than they would in markets entrants. This competition through entry puts down-
with an oligopolistic market structure. ward pressure on global prices for manufactures,
The theory also hypothesizes that technical change limiting the income-generation potential of foreign
in the production of manufacturing goods in devel- demand. In addition, embodied technical change
oped economies contributes to reducing the demand through imported capital goods tends to decrease,
for scarce raw materials that command high prices, rather than increase, prices. Under these conditions,
putting additional downward pressure on global an industrialization strategy designed to tap into
prices. For given import prices, such developments global demand for manufactured products will not
drive down the barter terms of trade and with them contribute to promoting wealth domestically.
the purchasing power of countries, making it harder For this reason, the literature has developed a more
to access the manufactured goods needed to promote differentiated view of export-oriented industrializa-
economic and social development.3 Balance of pay- tion to promote economic development, increasingly
ment problems might ensue as a result. The classical highlighting that successful industrialization requires
Prebisch-Singer hypothesis considers this problem to a continuous process of structural change and active
be particularly harmful for developing countries that participation in dynamic, technology-intensive mar-
rely heavily on exports of primary goods. The upper kets. In this way, developing countries can participate
part of Figure 4.1 summarizes the key arguments of in markets with a high-income elasticity of global
this classical literature. demand.
Because of the concerns emerging from the classi- Debare and Lee (2010) explore these arguments
cal Prebisch-Singer hypothesis for primary commodi- empirically. They show that if factor accumulation
ties, in the past developing countries were advised to makes a country expand faster than the rest of the
90
“ Export variety is a crucial
growth determinant, especially
for low‑income countries
Figure 4.1
The Prebisch-Singer hypothesis and the development of terms of trade 4
“Classical” Prebisch-Singer hypothesis
Inferior goods
(negative income elasticity or 0)
Deterioration of terms of trade

Necessities
(income elasticity between 0 and 1) Access to foreign
Engel’s law in international
products needed
demand for domestic goods
for development
Superior goods
(income elasticity 1 or higher) Improvement of terms of trade
(largely manufactured goods)
Fallacy of composition argument

“Modified” Prebisch-Singer hypothesis
Inferior manufacturing goods and necessities Superior manufacturing goods

• Low-tech/low-skill production • High-tech/skill-intensive (horizontal differentiation)
• Easy access to technology • Products “rich” countries produce/export (horizontal differentiation)
• High labour intensity • High quality variants of established product lines (vertical differentiation)
• Standardized products • Customized products (vertical differentiation)
“Commodification” “De-commodification”
i.e., competition in perfectly competitive markets → i.e., exploitation of excess profits from monopolistic
Products share characteristics of primary goods competition → Products command higher prices
Deterioration of terms of trade Improvement of terms of trade
world, that country’s barter terms of trade will deteri- rather than engaging in price competition with other
orate. But they also show that growing world demand exporters. Many studies support this view (see, e.g.
for a country’s export products can offset such a trend Funke and Ruhwedel 2001, Hallak and Schott 2011,
and eventually improve barter terms of trade. They Hummels and Klenow 2005, Schott 2004). Eicher
argue that countries have ways to avoid adverse terms- and Kuenzel (2016) show that for low-income coun-
of-trade effects by upgrading the quality and increas- tries especially, export variety is a crucial growth
ing the variety of their exports. In their opinion, only determinant.
countries that persistently fail to innovate should However, it is not just the variety of products that
experience a secular decline in their barter terms of countries export that matters—technical change and
trade. upgrading are also needed. Lall (2001), for instance,
This view means that variety effects are impor- argues that sound export structures are crucial for
tant for overcoming persistent declines in a country’s growth and development, with high-tech products
international purchasing power. Krugman (1989) generating the greatest benefits for exporters in terms
established that persistent declines in barter terms of of spillover effects, dynamically increasing returns
trade are unlikely, because fast-growing economies (learning effects) and dynamism in world trade.
tend to face high income elasticities for their exports Hausmann et al. (2007) argue that the quality of
and low income elasticities for their imports, which exports is a key determinant of economic growth and
tends to balance their terms of trade. He argued that that developing countries should strive to produce the
these economies typically expand their share in world goods that industrialized economies make. In their
markets by expanding the range of goods they export view, diversification towards dynamic products or sec-
rather than by lowering prices—that is, they try to tors is particularly important, as it limits the risk that
engage in monopolistic competition by diversifying the export market will become rapidly saturated and
91
“ It is not just the variety of
products that countries export
that matters—technical change
and upgrading are also needed
4 that prices will decrease, while increasing the chances

of exploiting the potential of long-term productivity
purchasing power from exports and generate incomes
domestically?
growth associated with export-oriented industrializa-
tion. To be able to produce such products competi- Increasing the purchasing power of
tively, however, firms need to meet minimum produc- manufacturing exports: Volume, price
tivity thresholds. Their capacity to do so depends on and variety
economic and social framework conditions and gov- Manufacturing exports from least developed coun-
ernment policy (see Chapter 6). tries (LDCs) and other developing economies have
Sutton and Trefler (2016) argue that countries gained considerable share in the global market (see
should consider quality differences within specific Annex C1, Table C1.2 for the complete list of coun-
product categories or industries (vertical differen- tries included in each group). Exports of (simple)
tiation), and that developing countries can increase manufactured goods from these two country groups
their economic performance by improving the quality have steadily increased even though at a much slower
of their manufacturing exports. Hence, they argue, pace than those from emerging industrial economies.
changes in the product mix as suggested by Hausmann In most developing countries, they have overtaken the
et al. (2007) are not necessary to improve income per exports of primary commodities (Figure 4.2).4
capita and economic performance, at least initially. Given the increasing importance of manufacturing
The upgrading of existing structures may prove a bet- exports in the developing world, this section provides
ter strategy, for once a developing country has reached an overview on how volume, price and variety effects
higher quality levels in the products it already exports, operate when economies attempt to capture domes-
it can then diversify into the more sophisticated and tic income from the expansion of global demand for
technologically intense varieties (typically exported by manufacturing goods.
industrialized economies) by entering these product The analysis is done examining estimates of
classes on the low-quality, low-price end of the quality income terms of trade, which are defined as the
ladder. For their part, industrialized economies should export volume (index-based) of a country multiplied
strive to diversify their product portfolio by generat- by its barter terms of trade (or alternatively as the
ing new, high-value products as low-income countries value of exports divided by an import price index).
enter these markets. This indicator captures both volume and price effects
The debate is far from settled. Still, this review of trade; it provides an indication of the purchas-
highlights the need to develop industrial policies ing power of exports in terms of how much they can
alongside supportive macroeconomic conditions with import. The focus will be MITT, which reflect the
the goal of capturing global demand for domestic purchasing power of manufacturing exports. MITT
manufacturing goods, in particular by targeting high- are calculated from manufacturing export volumes
value segments in global markets, so as to balance or and barter terms of trade (the pure ratio of export to
improve the terms of trade. import prices).
From a supply-side perspective, improvements in MITT are typically higher for industrialized
export unit values are typically seen as an upshot of than developing economies (as discussed below), but
innovation activities, which are important for cap- the two groups have converged somewhat over the
turing such global demand and triggering the virtu- past decade. MITT have improved faster in coun-
ous circle outlined in Chapters 1 and 2. However, try groups that also experienced higher growth rates
as demand-side aspects are vital too, this chapter in per capita income during the period. Indeed, the
examines the question: How can countries navigate data show that the country groups with the highest
shifts in global demand to secure high international cumulative growth rates over the decade saw strong
92
“ Failure to upgrade the quality
of exports is accompanied by
a deterioration of barter terms
of trade in manufacturing
Figure 4.2
An increasing share of emerging industrial economies in global export markets for manufacturing goods 4
100
Market share (percent)

75
50
25
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Industralized economies Emerging industrial economies Other developing economies Least developed countries

Source: Bykova et al. (2017) based on BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011).
gains in their terms of trade and an increase in export levels (real gross domestic product [GDP] per capita)
volumes, whereas countries that grew more slowly also have higher MITT, reflecting the purchasing
experienced deteriorating terms of trade and export power of exports in constant $.5 This relationship
volumes. exists because wealthier industrialized economies not
Monopolistic competition and related increases only export more, they also export goods with higher
in the variety and quality of the products countries technological content. The observations deviate far-
export seem to be important for capturing global ther from the regression line for three country groups
demand for domestic incomes (as shown below). in the Asia and Pacific region (industrialized, emerg-
The expansion of export volumes is closely related ing industrial and other developing), indicating that
to changes on the extensive margin (i.e., the variety the evolution of exports in these country groups has
of exports in terms of active export lines). A higher followed its own dynamics.
technological content of exports runs alongside gains If instead of the absolute value of the MITT
in the barter terms of trade in manufacturing; failure one looks at its changes during the last decade,
to upgrade the quality of exports is accompanied by the relationship shown in Figure 4.3 is inverted
a deterioration of barter terms of trade in manufac- (Figure 4.4). 6 Countries with lower export values
turing (Table A3.1 in Annex A3 provides a summary experienced stronger increases in their exports, and
overview of volume, price and variety indicators and industrialized economies experienced more mod-
their evolution). erate increases. This pattern reflects convergence:
Between 2003 and 2014, country groups that were
Manufacturing income terms of trade and not as strongly integrated in global trade integrated
economic performance more quickly than already well-integrated ones.
There is a close correlation between income and MITT improved fastest in LDCs in Asia and Pacific
MITT (Figure 4.3). Countries with higher income and slowest in industrialized economies across
93
“ Income terms of trade provide
indication of the purchasing
power of exports in terms of
how much they can import
4 Figure 4.3
Richer countries have stronger purchasing power of manufacturing exports
22
Manufacturing income terms of trade
Industrialized
economies, Americas
20 Emerging industrial economies,

Industrialized
Asia and Pacific
economies, Europe
18
Emerging industrial
economies, Europe
Emerging industrial
16 economies, Africa Emerging industrial
economies, Americas
Other developing Asia and Pacific
economies, Europe
Other developing
14
Fitted values (including all country groups) economies, Americas
Other developing
economies, Africa
12
Least developed
countries, Africa Least developed countries, Other developing economies,
Asia and Pacific Asia and Pacific
10
7 8 9 10 11
Log of real GDP per capita
Note: All values are for 2014 and in constant 2003 PPP$. GDP is gross domestic product and PPP is purchasing power parity. Regional and industrialization level classifications are based on,
respectively, Annex C1, Tables C1.1 and C1.2.
Figure 4.4
Countries at lower incomes increased their purchasing power of manufacturing exports the most
800
Least developed
countries, Africa
600
400 Other developing

economies, Europe
Fitted values (including all country groups)
Emerging industrial economies,
Asia and Pacific
Other developing economies, Emerging industrial
Asia and Pacific economies, Europe
Industrialized
200 Industrialized economies, economies, Europe
Least developed countries, Other developing
Asia and Pacific economies, Americas Asia and Pacific
100
Other developing Emerging industrial Industrialized
Emerging industrial economies,
economies, Africa economies, Africa economies, Americas
Americas
0
7 8 9 10 11
Log of GDP per capita (constant 2003 PPP$)
Note: The change in manufacturing income terms of trade is for the period 2003–2014 and in constant 2003 PPP$ (PPP is purchasing power parity). GDP is gross domestic product. Regional and
industrialization level classifications are based on, respectively, Annex C1, Tables C1.1 and C1.2.
94
“ Country groups that
experienced faster growth of
GDP per capita also improved the
international purchasing power
of their manufacturing exports
regions. MITT worsened for only three country

groups—i ndustrialized economies in the Americas,
experienced considerably stronger improvement of
their MITT than, say, the emerging industrial econ-
4
as well as the emerging industrial economies in omies in the Americas that grew at a similar pace
Africa and the Americas— a s evident from their over the period.

position relative to the horizontal reference line at This heterogeneity can be studied further by
value 100 in Figure 4.4.7 The correlation between examining how the components from which the
income levels and the change in MITT is weaker changes in MITT are calculated (changes in manu-
than the correlation with MITT in constant money facturing export volumes and changes in manufac-
terms, indicating that the underlying dynamics of turing barter terms of trade [MBTT]) correlate with
change in income terms of trade within country GDP per capita growth. The relationship between
groups are very heterogeneous. GDP per capita growth and changes in the export
Across country groups, changes in MITT over volumes is positive (right panel, Figure 4.6). The
the period of observation correlate positively with relationship between GDP per capita growth and
growth (Figure 4.5). Country groups that experi- changes in MBTT is very weak and negative for
enced faster growth of GDP per capita were also the whole sample but positive if LDCs and emerg-
able to improve the international purchasing power ing industrial economies in Asia and Pacific are not
of their manufacturing exports. Generally, country considered (left panel, Figure 4.6). Over the period,
groups that grew faster over the period also improved faster-growing country groups therefore experienced
their MITT more. However, there is considerable both a strong increase in export manufacturing vol-
heterogeneity across country groups. For instance, umes and an improvement in their barter terms of
other developing economies in Asia and Pacific trade. LDCs and emerging industrial economies in
Figure 4.5
Increasing the purchasing power of exports is associated with higher growth rates in per capita GDP
250
Other developing
economies, Europe
Other developing economies,

Asia and Pacific Least developed countries, Emerging industrial economies,
Asia and Pacific Asia and Pacific
200
Fitted values (including all country groups but omitting least developed countries in Africa)
Emerging industrial
Industrialized economies, Europe
economies, Europe
150
Industrialized economies, Other developing
Asia and Pacific economies, Africa
Other developing
economies, Americas
100
Industrialized
Emerging industrial
economies, Americas
economies, Americas
Emerging industrial
economies, Africa
50
0.2 0.4 0.6 0.8 1.0 1.2
Growth in GDP per capita (percent)
Note: All values are for the period 2003–2014 and in constant 2003 PPP$ (PPP is purchasing power parity). GDP is gross domestic product. Outliers with changes of over 500 percent relative to the
base year have been omitted. Regional and industrialization level classifications are based on, respectively, Annex C1, Tables C1.1 and C1.2.
95
“ To drive export growth, countries
tend to take advantage of global
demand for new varieties as well
as demand for existing varieties
4 Figure 4.6
Relationship between GDP per capita and changes in manufacturing barter terms of trade and
manufacturing export volumes
Manufacturing barter terms of trade Manufacturing export volume

140 500
Change in manufacturing barter terms of trade (index, 2003 = 100)
Change in manufacturing export volume (index, 2003 = 100)

Least developed
countries, Africa Least developed
countries, Africa
Other developing Fitted values (including all country groups but 400
economies, Africa omitting least developed countries and
Other developing emerging industrial economies in Asia and Pacific)
economies, Americas
120 Fitted values
Emerging industrial (including all country groups)
economies, Fitted values 300
Americas (including all country groups)
Emerging industrial Other developing
economies, Africa Other developing economies, Europe
Emerging industrial Other developing Other developing economies, Emerging industrial economies,
economies, Europe economies, Europe economies, Africa Asia and Pacific Asia and Pacific
200
Industrialized Least developed
100 economies, Europe countries, Asia and Pacific
Industrialized Other developing economies, Industrialized economies,
Asia and Pacific Emerging industrial
economies, Europe Asia and Pacific economies, Europe
100
Industrialized Industrialized Other developing
economies, Industrialized economies, economies, Americas economies, Americas
Americas Asia and Pacific Emerging industrial economies,
Least developed countries, Asia and Pacific Emerging industrial Emerging industrial
Asia and Pacific economies, Africa economies, Americas
80 0
0.2 0.4 0.6 0.8 1.0 1.2 0.2 0.4 0.6 0.8 1.0 1.2
Growth in GDP per capita Growth in GDP per capita
Note: All values are for the period 2003–2014 and in constant 2003 PPP$ (PPP is purchasing power parity). GDP is gross domestic product. Regional and industrialization level classifications are based
on, respectively, Annex C1, Tables C1.1 and C1.2.
Asia and Pacific, however, experienced high growth economies typically expand their share in world mar-
rates alongside decreases in the MBTT. Very differ- kets by extending the range of products they export.
ent processes seem to drive the relationship between Studies typically decompose cross-country export var-
MBTT and economic growth in these two country iations into extensive and intensive margins and study
groups. the contribution of these margins to export growth.
The emerging industrial economies in the Asia and The extensive margin reflects variation in the number
Pacific region increased their export quantities only of new varieties a country exports or in the number of
moderately, and their terms of trade declined over new markets (destinations) to which it exports active
the period. In contrast, the LDCs in Africa consid- product lines. The intensive margin reflects variation
erably scaled up their export quantities and strongly in export values within existing varieties (typically
improved their manufacturing terms of trade. In the the average world market share in exports a country
light of price, volume and variety effects, these pat- obtains). To drive export growth, countries tend to
terns indicate that the former group seems to have rely on the two margins simultaneously, that is, they
increased its export volumes by lowering prices and take advantage of global demand for new varieties as
the latter did so by increasing export prices. The same well as demand for existing varieties. However, the
trends can be seen for the other developing economies relative weight of the two components differs across
and emerging industrial economies in Europe, though country groups and according to a country’s level of
at more moderate levels. (These patterns are examined development.
in greater detail below.) Export volumes positively correlate with changes
in extensive margins (Figure 4.7, left panel). 8 The
Volumes and changes in the intensive and LDCs in Africa and other developing economies
extensive margins of manufacturing exports in Europe are the country groups where the exten-
As countries get richer, their exports diversify (Cadot sive margin drove changes in exported quantities
et al. 2011, Imbs and Wacziarg 2003), because the most. These countries started out from relatively
96
“ Evidence tends to support
the importance of monopolistic
competition rather than the
specialization perspective put
forward by traditional trade theory
Figure 4.7
Manufacturing export volume and changes in the extensive and intensive margins in manufacturing 4
exports
Extensive margins Intensive margins

500 500
Manufacturing export volume (index, 2003 = 100)
Manufacturing export volume (index, 2003 = 100)

Least developed
Least developed countries, Africa
countries, Africa
400 400
Fitted values (including
all country groups)
300 300
Industrialized economies, Asia and Pacific
Other developing
Emerging industrial Least developed Industrialized economies, Europe Fitted values (including
economies, countries, Other developing economies, Europe
Asia and Pacific economies, Europe all country groups)
Asia and Pacific Least developed
200 200 Emerging industrial countries, Asia and Pacific
Industrialized economies, Other developing economies, economies, Europe
Asia and Pacific Emerging industrial
Europe economies,
Other developing Other developing economies, Asia and Pacific
Emerging industrial economies, Africa Other developing economies, Africa Asia and Pacific
economies, Europe Other developing economies, Americas
100 Industrialized economies, Americas Other developing 100 Industrialized Emerging industrial economies, Americas
Emerging industrial economies, Africa economies, Americas economies,
Americas Emerging industrial
Emerging industrial economies, Americas Industrialized economies, economies, Africa
Asia and Pacific
0 0
0.00 0.05 0.10 0.15 0.20 –0.02 0.00 0.02 0.04 0.06 0.08
Change in extensive margins in trade Change in intensive margins in trade
Note: All values are for the period 2003–2014 and in constant 2003 PPP$ (PPP is purchasing power parity). Regional and industrialization level classifications are based on, respectively, Annex C1,
Tables C1.1 and C1.2.
low extensive margins. The higher the level of devel- Manufacturing terms of trade and
opment, the lower the importance of changes in the technological sophistication and upgrading
extensive margin in trade for the expansion of export Technical change and innovation are means to offset
volumes, as apparent from the experience of industri- decreases in the terms of trade over time (Acemoglu
alized and emerging industrial economies. Countries and Ventura 2002). Sutton and Trefler (2016) present
in these groups are typically already active in a large a process of economic development in which countries
number of export lines. first climb the quality ladder in products exported by
Intensive margins (average world market shares both developing and developed countries and then
in exports) and export quantities also correlate diversify into technologically more sophisticated
positively but rather weakly across country groups products, which typically only countries with higher
(Figure 4.7, right panel). Increases in the intensive income levels export. Only if countries consistently
margin were particularly significant for the emerging fail in this process should the purchasing power of
industrial economies in Asia and Pacific, where they their exports persistently worsen.
matched equally significant expansions of export Two indicators can be used to capture this process,
volumes in 2003–2014. Over the same period, the one reflecting technological upgrading as a result of
industrialized economies lost market shares and changes in the composition of the export basket of a
experienced a slower growth in export volumes. country, the other reflecting technological upgrading
The extensive margin was the prime driver of the in active product lines. Technological upgrading as a
expansion of export volumes for LDCs and other result of changes in the composition of the export bas-
developing economies between 2003 and 2014. This ket is captured by changes in the product complexity
evidence tends to support theories emphasizing the of the exports of a country group relative to all other
importance of monopolistic competition rather than country groups.9 Technological upgrading (or verti-
the specialization perspective put forward by tradi- cal differentiation) in active product lines is captured
tional trade theory. by changes in the share of exports in the highest unit
97
“ Technical change and
innovation are means to offset
decreases in manufacturing
terms of trade over time…
4 value segment by one country group over a period rela-

tive to all other country groups.10
economies in Europe and Asia and Pacific, the reverse
is true. The industrialized economies in the Americas
Increases in the average product complexity of the and Asia and Pacific increased their export shares in
products exported by a country group correlate posi- top unit-value segments but also experienced a moder-
tively with changes in the MBTT in 2003–2014 for ate decline in their MBTT. In the emerging industrial
LDCs and emerging industrial economies (Figure 4.8, economies and other developing economies of Africa
left panel, black regression line). This relation breaks and other developing economies in the Americas, a
down if the industrialized economies are included in decline in the top unit-value segment of export shares
the calculation, however. Industrialized economies was accompanied by an improvement in their MBTT.
went through a very specific type of development, The evidence thus lends support to the view that
characterized by a strong change in the composition of technological upgrading is a vital means to avoid persis-
their export baskets towards more complex products tent declines in the terms of trade and sustain domestic
and by a moderate decline in their MBTT. income generation (examples include the stellar per-
Technological upgrading in active product lines (as formances of some East Asian economies, described in
reflected in increases of export shares in the top unit- Box 4.1). The relationship is very heterogeneous across
value segments relative to other countries or country countries, however, suggesting that there is no stand-
groups) also correlates positively with improvement of ard approach to influencing changes to manufacturing
the MBTT (Figure 4.8, right panel), with considerable terms of trade through technological upgrading.
variation across country groups. Industrialized econo-
mies in Europe and emerging industrial economies and Development and impact of
LDCs in Asia and Pacific experienced a relative decline manufacturing export prices
in their export shares in the top unit-value segment. For This section examines changes to manufacturing
LDCs in Africa, the emerging industrial economies in export unit values and their impact on economic
the Americas and Europe and the other developing growth.11 Unit values are the ratio of the export
Figure 4.8
Technological upgrading offsets decreasing manufacturing terms of trade over time
Average product complexity Technological upgrading in existing product lines

140 140
Manufacturing barter terms of trade (index, 2003 = 100)
Manufacturing barter terms of trade (index, 2003 = 100)
Least developed Least developed

countries, Africa countries, Africa
Other developing Other developing

economies, Africa Fitted values (including all country groups) economies, Africa
Emerging industrial
120 Other developing 120 economies, Americas
economies, Americas Emerging industrial economies, Other developing Fitted values (including
Americas economies, Americas all country groups)
Fitted values (including
all country groups but Other developing Emerging industrial
industrialized economies) economies, Europe economies, Africa Emerging industrial Other developing
economies, Africa economies, Europe
Emerging industrial
Emerging industrial economies, Europe economies, Europe
100 100
Other developing economies, Industrialized Other developing economies,
Asia and Pacific Industrialized economies, economies, Europe Asia and Pacific
Europe
Industrialized Least developed Industrialized
Industrialized economies, countries, Asia and Pacific Industrialized economies,
Least developed countries, Asia and Pacific economies, economies, Asia and Pacific
Emerging industrial Americas Emerging industrial Americas
Asia and Pacific economies,Asia and Pacific economies,
Asia and Pacific
80 80
–3 –2 –1 0 1 2 –0.6 –0.3 0.0 0.3 0.6
Change in relative position complexity exports (standard deviations) Change in relative position complexity exports (standard deviations)
Note: All values are for the period 2003–2014. Manufacturing barter terms of trade in constant 2003 PPP$ (PPP is purchasing power parity). GDP is gross domestic product. The complexity of exports
is calculated according to Hidalgo and Hausmann (2009). The vertical axis in both panels presents the average changes in manufacturing barter terms of trade in each country group. Regional and
98
“ …but there is no standard
approach to influencing changes
through technological upgrading
Box 4.1
The Republic of Korea’s race to the top: Shifting
Figure 4.9
Growth in manufacturing export unit values 4
from quantity to quality, goods and education
Asia and Pacific (other
developing economies)

In the 1950s, the Republic of Korea was a low-income Americas
(industrialized economies)
country. Today it is one of the principal industrial pow- Asia and Pacific
erhouses of Asia, having grown at an average rate of
Africa
7 percent a year for 50 years. (least developed countries)
Americas (other
A major feature of the development strategy was to developing economies)
first raise domestic incomes through exports by selling Europe
low-quality, low-priced products, in order to increase Europe (other
presence on international markets. The economy later Americas (emerging
improved its international purchasing power through industrial economies)
Europe (emerging
extensive investments in technology and human capi- industrial economies)
Asia and Pacific (emerging
tal, which helped lift the technological content of its industrial economies)
exports, and with it, export prices. Africa (other
Kim (2001) shows how the economy of the Repub- Africa (emerging
industrial economies)
lic of Korea moved from a phase in which its industries
Asia and Pacific
merely duplicated the products more advanced coun- (least developed countries)
tries exported to a phase in which it engaged in a pro- –50 0 50 100 150 200 250
Growth rate of export unit values, 2003–2014 (percent)
cess of creative imitation. In the early imitative stage,
raising the general level of education was particularly Note: All values for the period 2003–2014 and in current $. Regional and industrialization level
classifications are based on, respectively, Annex C1, Tables C1.1 and C1.2.
important. It made it possible for the Republic of Korea Source: Foster-McGregor et al. (2017b) based on BACI International Trade Database (Gaulier
to understand technology templates acquired through and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011).
foreign technology transfer. In the second phase, more

formal technology transfer from abroad, corporate
research and development (R&D), universities and
public research institutes became the crucial sources was particularly steep in LDCs and emerging indus-
for augmenting the knowledge base. trial economies in the Asia and Pacific region and in
In response to competitive pressures from the
emerging industrial economies and other developing
export market to increase their productivity, domestic
firms started generating (and globalizing) new tech-
economies in Africa. Apart from emerging industrial
nologies themselves, fostering basic research in uni- economies in Africa, the growth rate of import unit
versities, mission-oriented applied research in public values for these four country groups was low, imply-
research institutes, corporate R&D and recruiting key ing fairly large gains in the manufacturing terms of
personnel from abroad. These efforts became the
trade. Emerging industrial economies in Europe and
most important sources of knowledge.
in the Americas and other developing economies in
Europe saw increases in export unit values of more
value of a product to its weight. They are commonly than 100 percent.
used as a proxy for export prices.12 The focus lies on Relative to the average for manufacturing, export
export unit values, which are a key determinant of the unit value shifts were unevenly distributed by indus-
MBTT. Changes in export unit values can be driven, try (Figure 4.10). Chemicals showed the highest
among other factors, by changes in variety—the increases in unit values. A few of the other sectors
export of entirely new, and potentially more expen- with strong rates are closely related to mining (down-
sive products, as well as changes in the composition stream industries following the pattern of increases
of existing export baskets—and price changes within in the unit values of primary commodities) (Foster-
existing product lines. McGregor et al. 2017b). Among the four sectors with
In 2003–2014 export unit values increased in all the smallest increase in export unit values, three have
country groups except one (Figure 4.9).13 Growth low technology intensity (according to the technology
99
“ Learning effects related to
production technology and consumer
needs gradually accumulate as
countries export specific products
4 Figure 4.10
Growth in unit values of exports by ISIC two-
at this level of aggregation does not allow one to con-
sider vertical price differentiation within an industry).
digit sector relative to all manufactured goods
To what extent are export unit-value increases
Chemicals and chemical products
associated with changes in the variety of exports, or
Coke, refined petroleum products

and nuclear fuel price changes in established product lines through
Basic metals quality improvements? The results discussed in the
Rubber and plastics products next subsection show that, although both factors
Other transport equipment matter, improvements in export unit values are more
Radio, television and communication
equipment and apparatus strongly driven by increases in the unit values of
Food products and beverages exports in existing product lines; the composition or
Office, accounting and
computing machinery variety of exports is much less important. This hints at
Machinery and equipment n.e.c. the importance of learning effects related to produc-
Wearing apparel; dressing
and dyeing of fur
tion technology, consumer needs and so forth (learn-
Medical, precision and optical
instruments, watches and clocks
ing through exporting), which gradually accumulate
Fabricated metal products, except
as countries export specific products. New varieties
Tanning and dressing of leather;
manufacture of luggage, handbags, tend to play a greater role in the development of export
saddlery, harness and footwear
Electrical machinery and unit values in LDCs—particularly in Africa and in
apparatus n.e.c.
Wood and of products of wood and
cork, except furniture; manufacture of
Asia and Pacific—an outcome that probably partly
articles of straw and plaiting materials
Paper and paper products
reflects the limited initial variety of exports in these
Furniture; manufacturing n.e.c.
countries.
Other non-metallic What is the impact of rising export unit values
mineral products
in manufacturing on economic growth? The results
Tobacco products
presented below confirm that improvements in
Textiles
Motor vehicles, trailers

manufacturing unit values have a significant impact
and semi-trailers
Publishing, printing and reproduction
on GDP per capita growth, especially for LDCs
of recorded media
and other developing economies, with a tendency
–50 0 50 100 150 200 250
Growth rate of export unit values, 2003–2014 (percent)
to have a weakly negative effect in the short run, as
Note: All values for the period 2003–2014 and in current $. The bars reflect sector-specific expected. These results imply that “commodification”
deviations from the overall growth trend in unit values for total manufacturing in the period.
Industry group classification is based on Annex C2, Table C2.1. ISIC is International Standard —persistently declining export prices in manufactur-
Industrial Classification and n.e.c. is not elsewhere classified.
Source: Foster-McGregor et al. (2017b) based on BACI International Trade Database (Gaulier
ing as industrial production remains concentrated in
and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011). inferior goods—is likely to have a negative impact on
GDP per capita growth.
classification of the Organisation for Economic Drivers of change in the prices of

Co-operation and Development [OECD]).14 manufacturing exports
The evidence reveals differences across regions Several factors drive the evolution of exports’ unit
(with increases strongest in Africa and in Asia and values, notably changes in the prices of goods already
Pacific) and across country development groups (with exported; changes in the composition of the basket of
increases in emerging industrial economies). It also goods already exported; additions to the export bas-
highlights wide heterogeneity by region and indus- ket; and removals from the export (or import) bas-
try. Industries with higher technology intensity and ket.15 The following analysis is carried out for export
industries related to specific raw materials saw higher unit values in current $, which increased for all manu-
increases, but the evidence is mixed (because analysis facturing sectors between 2003 and 2014.
100
“ ‘Commodification’ is likely
to have a negative impact on
GDP per capita growth
For all manufactured goods and across all coun-

try groups, the initial (2003) values of the export unit
with relatively small changes in composition and
the role of product entry and exit. LDCs in Asia and
4
value are largely in line with expectations, with the Pacific saw a fairly large degree of exit and entry, and a
highest values in the industrialized economies group large change in the composition of exports (but not in

and the lowest in developing Africa and the Americas the change in export unit values of existing varieties).
(Figure 4.11). Somewhat surprising are the relatively For most other country groups, a changing unit value
high initial values for other developing economies in of exports was the main driver of export unit-value
Asia and Pacific. These are largely driven by resource changes (most notably industrialized and emerging
based exports by some of the countries in West and industrial economies in Europe, the Americas, and Asia
Central Asia. Positive shifts took place for all groups and Pacific). Exceptions to this general pattern are other
except other developing economies in Asia and Pacific, developing economies in Europe and LDCs in Africa,
for which a small decline was observed (see Figure 4.9). for which the entry of new varieties was the main driver.
The largest percentage changes (over 200 percent) are Other developing economies in Asia and Pacific
observed in LDCs in Asia and Pacific and other devel- showed a decline in export unit values, driven by the
oping economies in Africa. In terms of the decomposi- entry and exit of products, with very little change in
tion, the two groups look quite different, however. the composition and unit value of existing exports.
In other developing economies in Africa, the main This pattern suggests movement out of higher towards
factor was a changing unit value of existing exports, lower unit-value products.
Figure 4.11
Country groups show wide differences in the drivers of manufacturing export price changes
6,000
Export unit values ($ per tonne)
Entry of traded products

Export unit values
Change in the export basket composition
Exit of traded products
4,500 Export unit value, 2003
3,000
1,500
–1,500
)
)
ies
es
ies
es
ies
es
es
es
ies
es
ies
es
es
mi
mi
mi
mi
mi
mi
mi
mi
ntr
om
om
ntr
om
no
no
no
no
no
no
no
no
ou
ou
on
on
on
co
co
co
co
co
co
co
co
dc
dc
ec
ec
ec
le
de
de
ge
pe
pe
ng
ial
ing
ing
ial
ed
tria
tria
lize
lize
pin
elo
elo
str
str
z
i
op
lop
lop
i
us
us
ial
elo
tria
ria
u
du
ev
v
l
ve
ve
ve
ind
ind
ind
de
str
ev
td
n
us
us
de
de
de
du
st
rd
ing
ing
ing
ing
as
ind
ind
lea
(in
er
er
er
(le
he
erg
erg
erg
erg
e(
s(
oth
oth
oth
a(
ific
(ot
ific
ca
rop
em
(em
em
em
ric
a(
e(
s(
ac
eri
ific
ac
Eu
Af
ca
ric
rop
a(
s(
e(
dP
Am
dP
ific
ac
eri
Af
ca
ric
rop
Eu
an
dP
ac
an
Am
eri
Af
Eu
dP
ia
an
Am
ia
As
As
an
ia
As
ia
As
Note: All values for the period 2003–2014 and in current $. The diamonds show the 2003 unit value of exports for each of the country groups. The bars show the changes in each of the four terms of the
decomposition of the total change in the unit value of exports in the period. Regional and industrialization level classifications are based on, respectively, Annex C1, Tables C1.1 and C1.2.
Source: Foster-McGregor et al. (2017b) based on BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011).
101
“ Globally, changes in the unit
values of existing varieties accounted
for much of the increase in export
unit values across sectors
4 Globally, changes in the unit values of existing

varieties accounted for much of the increase in export
the change in the composition of existing exports had
a negative effect on the change in the unit value. The
unit values across sectors (Figure 4.12). negative effects of product exit tended to be larger for
Changes in the unit values of existing varieties sectors that witnessed the smallest growth in unit
tended to be larger in sectors that saw the strongest values.

growth in export unit values (except for other trans- To summarize, the results of the decomposition
port equipment). For some sectors at the lower end show that increases in the unit values of existing
in terms of unit value growth (particularly textiles, exports usually drive improvements in manufac-
tobacco and wood), a changing unit value of exist- turing export unit values; the impact of changes in
ing exports played a more minor role. The role of new their composition is much smaller. The entry of new
varieties differed widely across sectors. It was more varieties tends to be more important for changes
important for textiles, tobacco, non-metallic miner- to export unit values in the LDCs—particularly in
als, wood and other transport and less important for Africa and in Asia and Pacific—a n outcome that
rubber and plastics; coke, petrol and nuclear fuel; and probably partly reflects the limited initial variety of
office and computing machinery. For most sectors, exports there.16
Figure 4.12
The drivers of manufacturing export price changes differ by industry
Composition of export basket Export unit value Entry of traded products Exit of traded products Growth in export value
100 350
Contribution to change in export unit value (percent)
Growth in export unit value (percent)

80 300
60 250
40 200
20 150
0 100
–20 50
–40 0
Furniture; manufacturing n.e.c.
Electrical machinery and apparatus n.e.c.
Medical, precision and optical instruments,
Machinery and equipment n.e.c.

Publishing, printing and reproduction of recorded media
Motor vehicles, trailers and semi-trailers
Textiles
Tobacco products
Other non-metallic mineral products
Paper and paper products
Wood and of products of wood and cork, except furniture;

manufacture of articles of straw and plaiting materials
Tanning and dressing of leather; manufacture of

luggage, handbags, saddlery, harness and footwear
Fabricated metal products, except
watches and clocks
Wearing apparel; dressing and dyeing of fur
Office, accounting and computing machinery
Food products and beverages
Radio, television and communication

equipment and apparatus
Other transport equipment
Rubber and plastics products
Basic metals
Coke, refined petroleum products and nuclear fuel
Chemicals and chemical products
Note: All values for the period 2003–2014 and in current $. Industry group classification is based on Annex C2, Table C2.1. N.e.c. is not elsewhere classified.
Source: Foster-McGregor et al. (2017b) based on BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011).
102
“ An increase in manufacturing
export unit values has a positive
and significant effect on GDP per
capita growth, in the long run
Impact of changes in manufacturing export

unit values on economic growth
effects are significantly negative for LDCs and other
developing economies, as well as in Africa and Asia
4
An increase in manufacturing unit values has a posi- and Pacific. Short-run effects are insignificant but pos-
tive and significant effect on GDP per capita growth, itive for industrial and emerging industrial economies

in the long run and across all countries and sectors: as well as countries in Europe and the Americas.19,20
Foster-McGregor et al. (2017a) show that a 1 percent-
age point gain in unit values induces an acceleration The risk of commodification in
of GDP per capita growth of about 0.02 percentage manufacturing exports
points (Figure 4.13, left panel).17 This effect is more The evidence presented in this section so far indicates
notable for LDCs and other developing economies; that unit values in manufacturing in current money
regionally, it is stronger in Africa, Asia and Pacific and terms steadily increased across regions and industrial
the Americas. For all other groupings, the effects are sectors. At first blush, this finding seems to contra-
not significant. dict a key assumption of the modified Prebisch-Singer
Across all countries, the short-run impact of hypothesis—namely, that developing countries run
export unit values is not significant for manufactur- the risk of falling into a commodity trap if they spe-
ing.18 The results suggest a weakly negative impact cialize in manufacturing products with low techno-
of manufacturing prices on per capita GDP growth logical content in production and low quality stand-
in the short run (Figure 4.13, right panel). Short-run ards, persistently failing to upgrade their exports
Figure 4.13
Higher prices of manufacturing exports accelerate economic growth, mainly in the long run
Long-run impact Short-run impact

0.08 0.04
Change in the growth rate of GDP per capita induced by a 1-percent
change in export unit values (percent)
Change in the growth rate of GDP per capita induced by a 1-percent

change in export unit values (percent)
0.04 0.02
0.00 0.00
–0.04 –0.02
–0.08 –0.04
es
es
trie s
ific
es
es
trie s
ific
e
un ie
ca
trie
un ie
ca
ric
rop
ric
rop
s
mi
mi
mi
mi
trie
co nom
co nom
ac
ac
s
s
eri
eri
Af
Af
un
Eu
Eu
no
no
no
no
dP
dP
un
Am
Am
co
co
co
ed co
co
co
ed co
co
an
an
de
le
lop e
de
le
lop e
All
All
ve ing
ve ing
ia
ia
tria
tria
lize
lize
As
As
de op
de op
us
us
tria
tria
st vel
st vel
ind
ind
us
us
ea de
ea de
ing
ing
Ind
Ind
dl r
dl r
an the
an Othe
erg
erg
O
Em
Em
Note: The figure presents the elasticity of the growth rate of GDP (gross domestic product) per capita induced by changes in manufacturing unit values: The dots represent the point estimates and the
lines the 95 percent confidence interval of the respective estimates. Manufacturing exports is of all goods, which refer to consumer goods, intermediate goods and capital goods together. Regional and
Source: UNIDO elaboration based on estimates by Foster-McGregor et al. (2017b) derived from BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database
(Berthou and Emlinger 2011).
103
“ Countries that comply with the
destination market’s regulatory
standards are better able to
escape commodity traps
4 technologically. However, the high level of aggrega-

tion of the data may mask commodification processes
level (Ghodsi and Stehrer 2017). From a policy point
of view, it is therefore important to strike a balance
at more disaggregated levels for certain export product between focusing on export activities and ensuring
lines and for trade flows to specific destinations. diversification of the export portfolio.
Analysing bilateral trade flows, Ghodsi and Ghodsi and Stehrer (2017) also find that qualita-
Stehrer (2017) show that both commodification and tive non-tariff measures such as technical barriers to
quality upgrading processes can be observed at the trade and sanitary and phytosanitary measures tend to
level of disaggregated bilateral trade flows. 21 Their mitigate the negative impact of commodification on
analysis indicates that persistent declines in export MBTT of a given sector if imposed against exports.
prices of dominant products in a sector have a negative This finding suggests that countries that comply with
impact on bilateral MBTT, whereas commodification the destination market’s regulatory standards, which
processes on the import side improve bilateral MBTT are objectively intended to increase the quality of
significantly.22 products and production procedures, are better able to
Moreover higher export specialization tends to escape commodity traps.
improve bilateral MBTT, an outcome likely to reflect In a trade environment that is increasingly driven
the positive impact of learning through exporting by technical regulations and quality standards, there-
on export prices, albeit probably with a large trade- fore, compliance—in quality, certification and labelling
off: Increased export diversity (i.e., export revenues —is important not only to ensure or retain market
that are spread more evenly over active product lines) access, but also to increase a country’s competitiveness
within a sector tends to reduce the negative impact of (Box 4.2). From a policy perspective, it is important
commodification of exports on MBTT at the sector to maximize adherence to trade standards—through,
Box 4.2
Increasing product quality in Colombia’s cosmetic sector
A country’s export destination matters. Exporting to high- products—ranging from make-up, hair- and skin care
income destinations where a more sophisticated and products to items for personal cleaning—derived from
diversified demand exists, for instance, can contribute natural ingredients, such as vegetable oils, extracts and
towards improving a country’s export prices. Consider, for essential oils. While the cosmetics industry has advanced
instance, the cosmetics sector. In industrialized econo- in its consolidation at the regional level, it is yet to take
mies, consumers’ preferences appear to be increasingly advantage of its full export capacity. Managing the quality
shifting towards goods produced using natural ingredi- of local natural ingredients is key to achieving this goal.
ents. In this context, the market potential for natural cos- Based on Colombia´s great biodiversity, natural cosmet-
metics exports is significantly enhanced. ics can not only position the country as a source of qual-
Yet increasing one’s export share within advanced ity products, they also can make industrial development
economy markets requires that exporting firms comply more inclusive by integrating local producers of ingredi-
with national and international regulations and stand- ents and small enterprises within the global value chain.
ards, as stipulated, for instance, by the WTO Agreement Since 2014, UNIDO has worked with Colombia’s Minis-
on the Application of Sanitary and Phytosanitary Meas- try of Industry, Commerce and Tourism to address quality
ures. Countries must establish efficient certification and related gaps and strengthen conformity with international
accreditation procedures in order to gain market access. standards in the country’s cosmetics value chain. To this end,
Proving compliance with quality standards by establishing the Cosmetic Sector Quality Programme aims to strengthen
an adequate quality infrastructure is therefore essential to the capabilities of Colombia’s national quality system. It
take advantage of a rapidly diversifying global demand. reinforces the country’s quality infrastructure, including test-
Moreover, standardization can also contribute to ensure ing, inspection, calibration and certification services. And it
consumer protection more broadly at the national level. supports key players within the value chain—from growers
Colombia’s cosmetics sector is a case in point. The to processors and exporters—to implement more stringent
country is a regional leader in the production of cosmetic international quality, private and sustainability standards.
104
“ Market size and sophistication
of both domestic and foreign
markets have a significant impact
on manufacturing unit values
to a more sophisticated and differentiated demand at

say, investing in infrastructure, reforming institutional
and administrative structures and upgrading produc- home, creating opportunities for both horizontal and
4
tion processes along value chains, particularly in agro-vertical domestic product differentiation. Controlling
industries (UNIDO 2015c). for export volumes, higher-quality or new products

command higher prices at given export volumes.
Impact of global demand characteristics Hence, increases in domestic GDP per capita should
on manufacturing export prices also improve export unit values. Finally, controlling
From a supply-side perspective, improvements in for home market and product differentiation effects,
manufacturing export unit values (and their positive increases in international demand for domestic prod-
impact on domestic income) typically reflect innova- ucts should have a positive effect on unit values by way
tion. This section takes a demand-side perspective, of simple demand shifts, which for given levels of fac-
focusing on the role of market and demand character- tor inputs will increase export prices.
istics of foreign and domestic demand in the evolution Drawing on Bykova et al. (2017), this section
of manufacturing terms of trade. explores the impact of global demand and demand
Market size and related scale economies are major characteristics on bilateral unit values at industry
determinants of trade specialization and trade flows level. It focuses on the impact on the unit value ratio
(Krugman 1980). If scale effects are important for of exports of a few indicators capturing the market size
production, companies that can benefit from them and demand sophistication of trading partners and
will prefer locating in larger markets, where a large international demand for domestic products. The unit
part of their products will be consumed and exported, value ratio is defined as the ratio of the unit value of a
lowering the domestic price level. This “home market product realized by an exporting country to a specific
effect” will affect trade flows and lower export unit destination to the average unit value of all its imports
values. from the world. Market size is proxied by real GDP
The gravity approach to international trade per capita. The results were obtained through econo-
— a s followed to a degree by Bykova et al. metric estimations controlling for several features of
(2017)—postulates that a good produced in any coun- both the exporting and importing country affecting
try will be exported to all other countries in propor- bilateral trade flows.
tion to the purchasing country’s GDP. Large destina- Bykova et al. (2017) lend some support to the
tion markets are therefore likely to augment domestic hypothesis that market size and sophistication of both
scale effects. Hence, both domestic and destination domestic and foreign markets have a significant impact
market size should lower export unit values. on manufacturing unit values. All else constant, econ-
Feenstra and Romalis (2014) stress that per capita omies of scale and increasing returns to scale reduce
income and the level of development induce more manufacturing unit values and help countries penetrate
sophisticated preferences and higher demand for qual- new markets through terms-of-trade effects. All else
ity. In manufactured products, demand for domestic constant, the income level of the exporting and import-
products from higher-income countries will there- ing countries increases manufacturing unit values, as
fore concern more sophisticated goods or unique more sophisticated and differentiated products target-
varieties from domestic production that command ing specific consumer preferences command higher
higher prices. Therefore, all else equal, for any level prices. This higher income level increases the purchas-
of domestic income, an increase of exports to high- ing power of exports and domestic wealth. To para-
income destinations should lead to an improvement phrase the title of a seminal paper by Hausmann et al.
in the manufacturing terms of trade. Higher domestic (2007), it is not only what you export that matters for
income (measured by real GDP per capita) gives rise economic development but also where you export to.
105
“ It is not only what you export that
matters for economic development
but also where you export to
4 Bykova et al. (2017) find that a change of real GDP

in both the importing and exporting country nega-
development. Such demand from developing coun-
tries has increased. The manufacturing income terms
tively correlates with the unit value ratio (Figure 4.14). of trade (which captures the international purchas-
A 1 percent change in real GDP in the importing ing power of exports) also improved across country
country has a particularly strong impact on LDCs and groups, growing more rapidly in country groups with
on low-tech sectors, with changes of 0.7 and 0.5 per- higher growth in per capita income. The most signifi-
cent, respectively, (panels b and d in Figure 4.14). A cant gains were in country groups with the highest
1 percent change in real GDP of the exporting coun- cumulative growth rates in 2003–2014.
try (panel a) has a strong effect on the unit value ratio The beneficial effects of an industrialization strat-
in emerging industrial and other developing econo- egy geared towards global demand depend on how
mies. The effect on the unit values of high-tech sectors countries adjust their terms of trade. If they consist-
is statistically not significant; for intermediate prod- ently fail to upgrade their manufacturing export port-
ucts it is close to zero. folios, they run the risk of seeing their terms of trade
The level of real GDP per capita (panels c and d) deteriorate as a result of commodification. They can
has a positive and significant effect on the unit value counter the impact by augmenting the technologi-
ratio and thus on export unit values in manufactur- cal content of exports and upgrading the quality of
ing for the pooled sample (all goods) and all other sub- exports.
groups shown in the figure. The effect of a change in Gains in manufacturing terms of trade are driven
GDP per capita of the importing country is particu- mainly by product upgrading within established
larly strong for LDCs and low-tech sectors, presenting export lines, which hints at the presence of learning
essentially the inverse picture of what is seen for the effects as countries accumulate experience through
impact of real GDP of the importing country on the export activities. Product upgrading also has a positive
unit value ratio. The effect of domestic GDP per capita impact on domestic incomes.
changes on the unit value ratios is particularly strong Upgrading— either in existing or new product
for emerging industrial economies and other devel- lines—a lso helps make industrialization truly inclu-
oping economies, for medium-high and medium-low sive. As discussed in Chapter 2, from a global per-
tech sectors and for capital goods. spective whether or not the circle leads to inclusive
The effect of changes in global demand for domes- outcomes largely depends on the extent, as well as
tic products is positive—about a 0.05–0.2 percent the modality in which countries participate in inter-
increase in the unit value ratio for a 1 percent increase national trade. When countries remain trapped in
of export values to a specific destination (Figure 4.15). labour-intensive, low-tech segments—or are left out
Global demand for domestic products is captured by altogether—the income generation potential of the
bilateral export values. Only for medium-high tech- circle is severely limited.
nology is the effect insignificant. The observed effect Among demand-side factors, exporting to larger
for capital goods is also relatively small, which is con- markets supports economies of scale and increased
sistent with the observation for the medium-high tech returns to scale, which provide room for reducing
sector, which also includes the machinery and equip- export prices and further expanding export volumes
ment industries. —both important factors for penetrating new markets
through terms-of-trade effects. Exporting to destina-
Policies to promote export-driven tions with higher incomes and more sophisticated
industrial development demand also tends to support increases in export
Capturing incomes from global demand for manu- price, with a positive effect on the purchasing power of
facturing is an important determinant of economic exports and on domestic wealth. Hence, for countries
106
“ Economies of scale and
increasing returns to scale reduce
manufacturing unit values and help
countries penetrate new markets
through terms-of-trade effects
Figure 4.14
Where you export to matters: Impact of market size and income level of trading partners on unit 4
value ratios
a. Impact on GDP in importing country b. Impact on GDP in exporting country

2 2
Change in unit value ratio induced by a 1 percent
change in export unit value to destination (percent)

1 1
0 0
–1 –1
–2 –2
s
es
es
es
es
um ch
Ca oods
ies
es
um ch
ds
s
od
od
od
od
od
od
tec
ec
tec
tec
ec
tec
tria omi
he velop omi
mi
tria omi
he velop omi
mi
o
te
te
pin untr
pin untr
go
go
go
go
erm r go
go
ht
ht
no
eg
no
eg
Me High
low
Me High
low
w
on
on
n
hig
hig
Lo
Lo
All
er
al
All
al
o
o
co
co
co
e
iat
iat
c
dc
m-
m-
pit
pit
ec
ec
ec
m-
m-
ge
le
ge
d
ed
ed
Ca
e
e
diu
diu
ing ized
ing ized
ns
ns
diu
diu
erm
Me
Co
Me
Co
us
us
ial
ial
elo
elo
Int
Int
ind
ind
e
Em ustr
Em ustr
ev
ev
td
td
rd
rd
as
as
Ind
Ind
Le
Le
erg
erg
Ot
Ot
Countries by Sectors by Sectors by end-use Countries by Sectors by Sectors by end-use

industrialization level technology level category industrialization level technology level category
c. Impact on GDP per capita in importing country d. Impact on GDP per capita in exporting country
2 2

1 1
0 0
–1 –1
–2 –2
s
es
es
es
es
ds
Ca oods
ies
es
um ch
ds
s
od
od
od
od
od
tec
ec
tec
tec
tec
ec
tec
tria omi
he velop omi
mi
tria omi
he velop omi
mi
o
o
te
pin untr
pin untr
go
erm r go
go
go
erm r go
go
ht
ht
no
eg
no
eg
Me High
low
Me High
low
w
on
on
n
hig
hig
Lo
Lo
All
al
All
al
o
o
co
co
co
e
e
iat
iat
c
dc
m-
m-
pit
pit
ec
ec
ec
um
m-
m-
ge
le
ge
d
ed
ed
Ca
e
e
diu
diu
ing ized
ing ized
ns
ns
diu
diu
Me
Co
Me
Co
us
us
ial
ial
elo
elo
Int
Int
ind
ind
e
Em ustr
Em ustr
ev
ev
td
td
rd
rd
as
as
Ind
Ind
Le
Le
erg
erg
Ot
Ot
Countries by Sectors by Sectors by end-use Countries by Sectors by Sectors by end-use

industrialization level technology level category industrialization level technology level category
Note: All values for the period 2003–2014 and in current $. The figure presents the elasticity of the growth rate of gross domestic product (GDP) per capita induced by changes in manufacturing unit
values: The dots represent the point estimates and the lines the 95 percent confidence interval of the respective estimates. All goods refer to consumer goods, intermediate goods and capital goods
together (for more details please see UNSD n.d. c). Industrialization level and technology classifications are based on, respectively, Annex C1, Table C1.2 and Annex C3, Table C3.2.
Source: UNIDO elaboration based on estimates by Bykova et al. (2017) derived from BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database (Berthou and
Emlinger 2011).
107
“ A stronger focus on specific
destinations in a sector can
facilitate upgrading processes
and improve the manufacturing
barter terms of trade
4 Figure 4.15
Unit value ratios improve with higher global demand for domestic products
0.25
Change in unit value ratio incuced by a 1 percent
0.20
0.15
0.10
0.05
–0.00
–0.05
All Industrialized Emerging Least Other High Medium-high Medium-low Low Consumer Intermediate Capital
goods economies industrial developed developing tech tech tech tech goods goods goods
economies countries economies
Countries by industrialization level Sectors by technology level Sectors by end-use category
Note: All values for the period 2003–2014 and in current $. See note in Figure 4.14.
Source: UNIDO elaboration based on estimates by Bykova et al. (2017) derived from BACI International Trade Database (Gaulier and Zignago 2010) and The Trade Unit Values Database (Berthou and Emlinger 2011).
pursuing an export-led growth strategy in manufactur- Box 4.3

Avoiding premature deindustrialization
ing, it is important to target larger markets with lower
prices first before later focusing on high-income mar- Export-driven development policies have produced very
kets with more sophisticated, higher-priced products. different results. In Asia they have led to sustained eco-
A stronger focus on specific destinations in a sec- nomic growth. In Africa and Latin America, they have not.
tor can facilitate upgrading processes and improve the In line with work by McMillan and Rodrik (2011),
McMillan et al. (2017) find that the differences reflect
manufacturing barter terms of trade. Diversification
differences in the reallocation of labour from agricul-
strategies may help mitigate the negative effect of ture to other activities. Countries where industrializa-
export commodification. Countries complying with tion policies led only to slow economic growth tended
product or process regulatory standards in leading to reallocate labour from agriculture to low-productivity
activities in services. In contrast, countries experienc-
export markets are also better able to avoid persistent
ing fast growth moved labour to high-productivity
declines in manufacturing export prices. activities in manufacturing.
The authors refer to the first of these two phenomena
Implications as “premature” deindustrialization, a concept first intro-
Policy-makers can promote export-driven industriali- duced by Palma (2008). They suggest that a combination
of classical industrial policies (such as subsidies to man-
zation by encouraging upgrading and innovation (on
ufacturing) and structural policies targeting the business
the supply side) and stimulating the choice of some environment, education and the rule of law are needed.
types of export destination over others (on the demand Rapid industrialization through classical export-oriented
side). Countries that fail to exploit these opportunities industrialization policies without structural policies will at
risk moving into a downward spiral of declining terms best lead to episodic growth, according to the authors,
and structural polices without a proactive policy towards
of trade and competitiveness that neutralizes any posi-
export-led industrialization will lead to slow growth.
tive effect from industrialization (Box 4.3).
108
“ Policy‑makers can promote
export‑driven industrialization
by encouraging innovation and
stimulating the choice of some
export destinations over others
Export-led industrialization occurs in two phases.

In the first, low export prices can drive market entry
current competence base can be used to develop
related areas in which the country does not yet
4
and the expansion of manufacturing exports. At this have a competitive advantage.
stage, classical industrial policies are crucial to start • Industrial diversification is likely to be success-

and deepen the process. To avoid adverse effects on ful if a competence base for new economic activi-
manufacturing terms of trade, the technological ties is gradually built to the point where a critical
sophistication and quality of these exports need to mass is reached. Policies aiming at strengthening
gradually improve in the second phase, as countries the competitiveness of countries should therefore
shift their export destinations towards higher income assess existing productive structures as well as the
markets. In this crucial phase, support to firms to knowledge base and take these competencies as a
meet quality standards in high-income countries and starting point.
related trade-facilitation activities may be extremely • Export destinations should be carefully selected.
useful, aligned with structural policies in education, This is an area where government can play a critical
training, the business environment and conditions for role, for example, as a provider of market intelli-
private entrepreneurship. gence (see Chapter 6).
Two pointers for industrial policies emerge. The • In the long run, diversification beyond local capa-
first concerns the reasons why countries fail to redirect bilities and comparative advantage is a key driver of
labour from agriculture to manufacturing. The second economic growth (Lin and Chang 2009, Saviotti
concerns the balance needed to achieve diversification and Frenken 2008). To defy the forces of compara-
and specialization. On both issues the literature pro- tive advantage, huge investments in education and
vides no definitive answers—nor can it. Policy-makers research are needed (Mehta and Felipe 2014). It is
must recognize that the development of a country’s thus important to strike a balance between struc-
productive structures is a highly cumulative, path- tural policies (promoting diversification beyond
dependent process and that structural change is neces- existing comparative advantages) and more tradi-
sarily rooted in the current knowledge base, in indus- tional industrial policies (promoting export-driven
trial specialization and in diversification, with multiple industrialization based on comparative advantages
implications for industrial and structural policies: and capabilities in related domains) (McMillan
• If the export success of one product is intrinsi- et al. 2017).
cally related to the ease with which factors move • If there is no or very little opportunity and the local
between economic activities, the benefits of diver- competence base is unrelated or very distant to
sification can be reaped only if factor substitution sectors with the potential to generate income and
mechanisms operate properly. Structural policies employment, countries may get trapped in inferior
supporting the mobility of labour and the removal productive structures if the strategy focuses too nar-
of obstacles related to investment and capital cir- rowly on the existing competence base (Jankowska
culation are critical. et al. 2012). One way to minimize the necessary
• It is not possible to develop internationally com- competency build-up is to assess how much the cur-
petitive products out of the blue. Unique spe- rent competence base enables the economy to join
cializations are key drivers of the development of international value chains and to develop know-how
comparative advantage and international competi- necessary for just one of several production stages
tiveness. New exports must be rooted in the exist- or production tasks (Baldwin 2006). Another is to
ing competence base, and complementary factors assess whether complementary investments to make
and competencies must be built. Modern indus- certain economic activities possible are needed and
trial policies should therefore consider how the carry out up- and downstream investments.
109
“ Support to firms to meet quality
standards in high‑income countries
and related trade‑facilitation
activities may be extremely useful
4 • Industrialization strategies should not be designed

and executed top down; they should enable “entre-
• Consider the feedback of changes to domestic
incomes on the domestic industrial base. Higher
preneurial discovery” (Rodrik 2004). The devel- incomes may favour more variety in domestic
opment of new economic activities is a discovery manufacturing.
process in which entrepreneurs explore economic • Use the forces of specialization and comparative
opportunities. advantage to drive diversification and structural
These insights and the evidence in this and earlier change, and identify and act on needs to existing
chapters yield some general principles for policy-mak- competence and knowledge bases.
ers, which are further elaborated in Chapter 6: • Conduct in-depth analysis of the current strengths
• Review potential markets for domestic products and weaknesses of the domestic manufacturing
and their potential feedback on domestic indus- sector, its capabilities, its links to other sector and
trialization efforts. Countries should enter large ways to reallocate production factors from low- to
unsaturated markets first, only later entering high- high-productivity activities.
income markets with more sophisticated demand. • Acknowledge the interplay between industrial
• Expand export volumes through diversification specialization and diversification beyond existing
and upgrading of products in existing markets. comparative advantages. The complementarity
Doing so requires constant improvement of the and timing of policies promoting the exploitation
business environment, smoothly operating fac- of existing capabilities and promoting structural
tor markets and the provision of education and change are key elements in long-run success, with
training. the latter particularly crucial.
Notes
1. The terms “global demand,” “foreign demand” 4. The share of primary commodity exports and nat-
and “external demand” are used interchangeably ural resource–based exports from the Americas,
throughout the report to refer to the demand that the Middle East and North Africa and South Asia
takes place outside the domestic economy. has decreased sharply. Sub-Saharan Africa (and
2. See Prebisch (1950) and Singer (1950). Baffes and LDCs generally) still rely heavily on these types of
Etienne (2016), Grilli and Yang (1988), Harvey exports.
et al. (2010), Ocampo and Parra Lancourt (2006), 5. The total export value of the manufacturing sec-
Sapsford (1985), Spraos (1980) and Thirwall and tor was divided by the export price index, and
Bergevin (1985) provide qualified empirical sup- this adjusted figure was divided by the import
port for the long-run deterioration in the terms price index. Both import and export price indexes
of trade of commodity-exporting developing were calculated as chained Fisher indexes from
countries. Harmonized System (HS) six-digit level product
3. Foster-McGregor et al. (2017b) provide a more data using CEPII’s BACI database. The cross-sec-
nuanced finding. They show that for non-energy tion correlation shown in Figure 4.3 is consistent
commodities, rising export prices can have a over time when panel data are used.
positive impact on economic growth but that the 6. Changes in the MITT are analysed using an
prices for these commodities follow cyclical pat- index number with base year in 2003. This index
terns in the medium and long run, with the cur- has been constructed combining a quantity index
rent cycle pointing down. of exports with base year 2003 and the terms
110
of trade calculated as a ratio of the import and
export price indices with the same base year.
manufacturing exports: Volume, price and vari-
ety,” price indexes referring to a base year were
4
7. An index value of 100 indicates that the MITT used. Taking the unit values of the individual sec-
did not change with respect to the base year; val- tors relative to aggregate manufacturing allows

ues below and above 100 point to deterioration the sectors that have performed relatively well and
and improvement, respectively. relatively poorly (compared with total manufac-
8. This indicator was calculated using the decompo- turing) to be examined (Annex C3, Table C3.2).
sition proposed by Hummels and Klenow (2005). 14. See (Annex C3, Table C3.2).
9. The indicator for the complexity of the export 15. Feenstra and Romalis (2014) among others con-
basket of countries is based on an indicator devel- sider the notion that the price of the export basket
oped by Hidalgo and Hausmann (2009). It is a may change due to pure price effects as well as to
proxy for latent information on the breadth and changes in quality.
depth of the knowledge base needed to export 16. Foster-McGregor et al. (2017a) decompose export
a specific basket of products. The indicator was unit values for broad economic categories across
standardized across countries for each year. The regions. Their results largely echo the evidence
indicator values reflect standard deviations from presented here.
the mean. The indicator thus reflects the relative 17. The analysis focuses on manufactured goods
position of a country group relative to the global traded internationally. The capacity to export
mean. A change in this indicator indicates the goods is, however, linked to the productive struc-
number of standard deviations by which a coun- ture of the economy and to fluctuations in the
try group changed its relative position in the price of these traded goods, affecting countries’
distribution. economic possibilities.
10. This indicator was calculated by allocating each 18. This is measured in terms of a linear combination
bilateral trade flow at the level of six-digit product for three lags.
lines to a specific tercile in the global distribution 19. The insignificant results at the level of country
of unit values in that product line. Its export share groups likely reflect the systematic differences
in each tercile was then calculated. The aggregate in value-weighted manufacturing unit values
export shares in the top unit value segment were between countries at different levels of economic
then obtained through weighted aggregation. development (i.e., the fact that there is much
11. This section draws on Foster-McGregor et al. variation between country groups but much less
(2017a). within them). Therefore, in the econometric anal-
12. Unit values are calculated as the ratio between ysis carried out within country groups, differences
the values (in $) of exports and the volume (in in manufacturing unit values are a less distinctive
tons). Export shares were taken from the BACI factor for economic growth (especially for indus-
database and a concordance between HS and the trial and emerging industrial economies) than for
International Standard Industrial Classification an analysis between country groups, where differ-
of All Economic activities (ISIC) from the World ences in manufacturing value are more significant
Bank (n.d. a) was used to aggregate from the HS and are therefore identified as an important dis-
six-digit product level to the ISIC two-digit level. tinctive factor for economic growth.
13. Export unit values were calculated in cur- 20. Foster-McGregor et al. (2017a) also examine the
rent dollars. It is therefore not surprising that short- and long-run impacts of changes in manu-
the unit values for all sectors increased. In the facturing unit value on GDP per capita growth for
section “Increasing the purchasing power of different product groups along broad economic
111
4 categories. These results show a positive and sig-
nificant long-run effect of manufacturing unit
products that Germany imports from the rest of
the world, this indicator will be larger, indicat-
values for consumer and intermediate goods across ing that Bangladeshi textile exports to Germany
all countries, but a breakdown by country groups are undergoing commodification. They measure
generally tends to deliver insignificant results. the commodification of exports as the cumu-
21. Ghodsi and Stehrer (2017) use bilateral trade lative decline in the relative price that a coun-
data at the HS six-digit level to calculate bilat- try’s exporting sector faces in a specific export
eral MBTT at the ISIC Rev. 3 industry level. destination.
They measure the commodification of exports 22. Ghodsi and Stehrer (2017) show that persistent
as the cumulative decline in the relative price price increases of exports tend to worsen the bilat-
that a country’s exporting sector faces in a spe- eral MBTT of other developing economies and
cific export destination. If, for instance, the tex- LDCs. They interpret this result as an indication
tile sector in Bangladesh exporting to Germany of the difficulties these groups of countries face
experiences substantial declines in export when trying to increase the quality of exports
unit values over time relative to other textile alongside that of imports.
112
Chapter 5
Moving towards sustainable

Demand for manufacturing goods and production of environmental goods. As long as envi-
the environment ronmental goods do not complete their transition
A continuous increase in consumer demand improves towards massification, they cannot be produced at the
consumers’ welfare (see Chapters 1 and 2). More scale needed for the substantial price reductions that
demand is translated into more production of goods, can stimulate further production.
which stimulates profits and wages and further Market policies aimed at reducing the price of
demand and production. environmental goods and increasing the prices of
This virtuous process can harm the environment, conventional goods are tools policy-makers can use to
however, for three main reasons. increase the production scale of environmental goods.
• Growing and sustained demand for prod- On the consumption side, policies aimed at increas-
ucts requires the use of non-renewable natural ing consumer awareness of environmental issues and
resources. Materials and resources are being con- correcting information-related market failures, such
sumed at a pace that is not sustainable. as labelling, are key. The market alone will not ensure
• The production of manufactured goods often a sustainable development path. Domestic regulation
requires the burning of carbon, which emits green- and international agreements (including agreements
house gases, which lead to climate change. compatible with the growth needs of least developed
• Products need to be disposed of. If policies for countries) are needed.
recycling or reuse are not adopted and enforced, The 2030 Agenda for Sustainable Development
waste disposal costs will become unbearable. features important Sustainable Development
To maintain sustainable growth, economies need Goals (SDGs) on the environment: SDG 6 (Ensure
to produce and consume environmental goods more access to water and sanitation for all), SDG 7 (Ensure
efficiently, generating less waste. A new production access to affordable, reliable, sustainable and modern
paradigm is needed to shift towards renewable energy energy for all), SDG 12 (Ensuring sustainable con-
and reduce the use of natural resources. sumption and production patterns), SDG 13 (Take
This chapter defines environmental goods as urgent action to combat climate change and its
goods that meet basic needs or improve the quality impacts), SDG 14 (Conserve and sustainably use
of life while minimizing the use of natural resources the oceans, seas and marine resources) and SDG 15
(including toxic materials) and the emissions of waste (Sustainably manage forests, combat desertification,
and pollutants over the product’s life cycle, in order halt and reverse land degradation, halt biodiversity
to avoid jeopardizing the quality of life of future loss). For decades previously, scientists and practition-
generations.1 ers perceived growth and environmental protection
Producers aim to attract consumers sensitive to as rivals, but now growing attention is on ensuring
environmental issues by signalling that their products growth while preserving the environment and pro-
are “environmental.” Some of these goods (such as moting inclusiveness.
organic food and electric cars), have significant mar- The UNIDO aim of achieving inclusive and sus-
ket shares, but the shares are still small compared with tainable industrial development reflects SDG 9 “Build
traditional goods. resilient infrastructure, promote inclusive and sustain-
High prices, gaps in consumer awareness of envi- able industrialization and foster innovation.”
ronmental concerns and biases in purchasing behav- Promotion of the virtuous circle of manufacturing
iour are huge obstacles to the consumption and consumption is fully aligned with meeting SDG 9, via
113
“ In the virtuous circle of
sustainable consumption, the
massification of manufacturing
goods would become less
harmful to the environment…
5 promoting industrialization through demand mecha-

nisms. The challenge is to combine industrialization
previous chapters is adjusted to take into account
various mechanisms that contribute in rendering the
and the full accomplishment of SDG 9 with environ- circle environmentally sustainable (Figure 5.1). This
mental protection and the full achievement of the framework implicitly assumes a trajectory of continu-
Moving towards sustainable manufacturing consumption
other SDGs. International organizations will play a ous growth fed by sustainable-demand mechanisms.
role in this. Variety is nurtured by the creation of new goods,
but their production requires an increasing volume
A sustainable virtuous circle of of polluting inputs that contribute to climate change.
manufacturing consumption To counteract the negative impacts, countries need to
This virtuous circle was the basis for industrial devel- spend part of their income to limit emissions (miti-
opment and welfare gains in many now-rich countries. gation) or to adapt to climate change (adaptation)
The creation of new goods satisfying demand and their (Nordhaus and Yang 1996). Some studies show that
production at scale are the basis for reducing goods climate change will affect poor countries especially
prices, increasing real incomes and stimulating new (Moore and Diaz 2015). Globally, the pace of annual
profits and wages. But raising demand for manufac- growth in gross domestic product (GDP) per capita
turing goods stimulates firms to increase their inputs could drop from 3.2 percent in 2020 to 2.6 percent
—notably from the environmental angle, fossil-fuel in 2100. As Industrial Development Report 2016
energy and other pollutants. It also encourages house- (UNIDO 2015b) shows, in this new paradigm firms
holds to create waste that needs to be disposed of. replace fossil fuels with renewable energy if their
Growing demand for manufacturing goods prices fall and are fully in a position to use their energy
requires a massive increase in the use of natural sources efficiently, when profitable. Products obtained
resources, but as they are limited, consumption cannot by more environment-friendly production processes
be unlimited. This is not a new concept: Club of Rome would represent a new variety of goods.
economists (Meadows et al. 1972) in the early 1970s The management of waste is also critical.
highlighted the risks of an industrialization not based Traditionally, waste has been considered a “bad.” But
on sustainability. They reached two main conclusions. discussions of the “circular economy” stress that waste
The first was that within 100 years, with no major has value. The rate of growth in the world market for
change in the physical, economic or social relationships scrap, for example, exceeds the rate of growth of trade
that traditionally governed world development, soci- (UNIDO 2015b). Waste has value because treatment
ety would run out of the non-renewable resources on allows the recovery of materials that can be reused as
which the industrial base depends. Second, after the inputs or for the remanufacturing of industrial goods.
authors assumed a doubling of the resource stock and Massification of environmental goods is accom-
with a model to assume alternative visions based on panied by huge cost reductions. VDMA Photovoltaic
this new higher level of resources, the collapse would Equipment (2016) documents that the learning rate
still happen, but this time caused by excessive pollution (the proportional drop in cost per unit for a doubling
generated by the increased pace of industrialization of the installed capacity) for photovoltaic energy is
(enabled by the greater availability of resources). 21.6 percent.
Some authors (such as Latouche 2006) argued In the virtuous circle of sustainable consump-
that the only way to tackle the collapse—whenever tion, the massification of manufacturing goods would
it happened—was to halt economic growth through become less harmful to the environment because the
reducing consumption and demand for natural risk that billions of tons of goods (some hazardous)
resources. This chapter follows a different approach: need to be disposed of is reduced. This would be a new
The virtuous circle of consumption introduced in paradigm where production no longer contributes
114
“ …as fossil fuel inputs are
gradually replaced with renewable
energy; materials and energy are
used more efficiently; and final
goods are reused or recycled
Figure 5.1
A sustainable virtuous circle of manufacturing consumption 5
Less environmental Lower costs incurred for
environmental remediation increase

damage incomes for purchase of goods
Augmented Increase in New income

purchasing power discretionary shifts demand from
of all consumers income necessities to
other goods Green industrial
Massification of environmental Price production generates
goods leads to further declines effect new varieties of goods
in their prices
Variety Efficient use of
Diversification of
Decline in price of Decline in prices of Global wages effect materials, fossil
manufacturing
environmental goods massified goods and profits energy and adoption
demand
of clean energy
Volume
effect
and innovation Massification of industry increases
increase efficiency production efficiency
further manufacturing
demand
Recycling contributes
to inputs availability and
new varieties of products
Reuse and remanufacturing of wasted products Less waste
further enhances massification of goods
hugely to pollution, and its reduction helps to generate material, used as a source of energy, or as a last resort,
income (or forestall losses), because part of GDP is no disposed of” (UNIDO 2017a).
longer needed to reduce pollution or pay for environ-
mental damage. Impacts on environmental
In synthesis, the virtuous circle of sustainable con- sustainability
sumption is a system in which fossil fuel inputs are Until recently, indicators did not capture the energy and
gradually replaced with renewable energy; materials environmental costs of growth. An indicator created
and energy are used more efficiently; and final goods by the World Bank—adjusted net savings — monitors
are reused or recycled to feed back into the input-gen- whether depletion of natural capital, such as minerals
eration process. In this system, environmental goods or forests, is compensated for by investment in other
are produced at low prices and largely consumed, assets, such as human capital or machinery. A positive
whereas “dirty” conventional goods produced with indicator shows that a country is adding to its overall
unsustainable production practices are phased out. wealth and that its economic growth is sustainable;
The full operationalization of the sustainable vir- a negative indicator means that countries are destroy-
tuous circle of demand would be consistent with the ing their wealth. Adjusted net savings are lower than
realization of a circular economy (Box 5.1). According the traditional gross national savings for all country
to the UNIDO definition of circular economy: income groups (Figure 5.2). A big gap is in low-income
“Products are designed for durability, reuse and countries, mainly because many of them rely on unpro-
recyclability, and materials for new products come cessed commodity exports, which rely on depletion.
from old products. As much as possible, everything Low-income countries often struggle to find the right
is reused, remanufactured, recycled back into a raw capabilities, governance, institutional arrangements and
115
“ In a circular economy, resources
are used over and over owing to
systemic innovations that link
products, producers and consumers
5 Box 5.1
UNIDO and the circular economy
In industrialized and, to a lesser degree, emerging econ- systemic leakages and negative externalities to the envi-
omies, the preferences of businesses and consumers ronment are minimised.
appear to be gradually shifting towards recycling and Economic gains from the circular economy are signifi-
greater resources efficiency. Yet today’s mass produc- cant. The Ellen MacArthur Foundation, for instance, esti-
tion remains, by and large, a linear process. Resources mates that the widespread adoption of circular business
are extracted from the environment, transformed into new models could result in yearly materials cost savings of $1 tril-
products, and then disposed back into the environment lion by 2025 (Ellen MacArthur Foundation 2015). UNIDO is
after use. This process, as discussed in this Chapter, con- mainstreaming circular economy principles throughout its
tributes to the depletion of finite natural resources, as well entire technical cooperation portfolio. The Organization
as to the accumulation of waste and pollution, creating already helps transform industries into contributors to the
negative environmental consequences. circular economy in several ways. It supports producers in
Against this backdrop governments and other entities, reducing, or eliminating, pollution and waste; it encourages
including China and the European Union, are increasingly the use of resource and energy-efficient technologies, as
encouraging the adoption of circular economy principles well as renewable energy, in production; and it introduces
in order to increase resource efficiency and reduce waste. efficient ways to re-use industrial and biological resources.
In a circular economy, resources are used over and over One example is Chemical Leasing, a business model
owing to systemic innovations that link products, produc- designed and implemented by UNIDO and the network of
ers and consumers. The lifespan of products is extended National Cleaner Production Centres (NCPCs) since 2004.
through improved design and servicing: Products are Chemical Leasing is a pay per performance based model
designed for durability, reuse, remanufacture and recy- that aims to change the relationships between manufac-
clability. New business models based on connectedness turers and their suppliers. Under Chemical Leasing, sup-
through internet of things, sharing economy and paying plier firms lease the chemicals. Suppliers remain owners
for performance propagate circular economy practices of the chemical, and are paid for any services—including
among businesses and throughout society. Moreover, application, recycling and disposal—p rovided to firms
waste is relocated from the end of the supply chain to the using the chemicals (Lozano et al. 2014). Chemical Leas-
beginning, so that materials for new products come from ing results in increased efficiency in the use of chemicals,
old products, consequently closing the loop. As a result, minimizing waste that is generated in production.
inputs to transform natural resources into value added. example often cited by environmental economists is
They do not reinvest enough revenues from commodi- the recreational value of a lake (Perman et al. 2003).
ties in human capital, infrastructure and machinery. “Contingent valuation” estimates the value people
Traditional accounting of investment does not place on such a good by asking them to state their
capture countries’ savings rates, just as GDP does not “willingness to pay” to obtain it rather than inferring
capture well-being. Stiglitz et al. (2009) conducted it from observed behaviour in markets. These tech-
one of the most popular analysis of new accounting niques are not always reliable, in part because “willing-
techniques to measure prosperity. They point out that ness” estimates depend heavily on respondents’ socio-
monetary measures of environmental variables, such economic status (rich people tend to be more willing
as net adjusted savings, are very important but can- to pay for environmental goods than do poor people).
not represent the universe of indicators complement- The world needs ambitious targets for economic
ing traditional statistics of economic variables such as development reflecting multidimensional challenges
GDP and investment. The value of many non-market (Hinterberger et al. 2012) but because of these limi-
environmental variables cannot yet be precisely and tations, Stiglitz et al. (2009) suggest focusing on a set
reliably measured simply because they are not priced. of physical indicators. This set is still patchy, which
Much progress has been made in estimating is problematic for implementing and monitoring the
non-market environmental assets, however. An SDGs
116
“ The ecological footprint, the
atmospheric carbon concentration
and the accumulation of rubbish
suggest that the world is on
an unsustainable path
Figure 5.2
Lowest saving rates at each end of the
and extraction technologies.” The biocapacity index
does not incorporate the price of the resources and
5
income curve
other economic considerations. It is usually measured
40
Savings (percent of GNI)
in hectares. Since the early 1970s, the world has been

Gross net savings
Adjusted net savings
consuming more natural resources than the earth is
30 able to produce (Figure 5.3)—an unsustainable path.
This index includes six components: livestock,
agriculture, infrastructure, marine resources, defor-
20
estation and climate change. Climate change is the
most important. Its significance has steadily increased.
10 The greenhouse gas atmospheric representa-
tive carbon concentration pathways (RCP) of the
International Institute for Applied Systems Analysis
0
(IIASA) make clear the uncertainty of projections
for climate change emissions (Figure 5.4). The range
–10 of possible outcomes is still very broad, but evidence
Low Lower- Upper- High
income middle income middle income income is robust in pointing out that delays in taking actions
Note: All values are for 2015 and in current $. GNI is gross national income. Adjusted net savings to tackle it will lead to a heavier bill for mitigation and
is calculated as “gross savings minus consumption of fixed capital, plus education expenditures,
minus energy depletion, mineral depletion, net forest depletion, and carbon dioxide and air
adaptation (Executive Office of the President of the
pollution damage” (World Bank 2017a, p. 234), and gross savings as “gross national income
less total consumption, plus net transfers” (World Bank 2016a, p. 237). Income classification is
United States 2014).
based on World Bank (Atlas methodology, GNI per capita in $) for the calendar year 2015 (see An increasing trend is also expected for waste.
World Bank n.d. b).
Source: UNIDO elaboration based on World Bank (2017a). The world counts 3 billion urban residents produc-
ing 1.2 kg per person per day of waste amounting to
1.3 billion tons per year (Hoornweg and Bhada-Tata
Indicators of unsustainability: The 2012). The member countries of the Organisation for
ecological footprint, the atmospheric Economic Co-operation and Development (OECD)
carbon concentration and the are the largest waste generators. Although OECD
accumulation of rubbish countries will peak by 2050 and Asia–Pacific coun-
Three indicators—the ecological footprint, the atmos- tries by 2075, waste will continue to rise in the fast-
pheric carbon concentration and the accumulation of growing cities of Sub-Saharan Africa (Hoornweg et al.
rubbish—suggest that the world is on an unsustain- 2013) (Figure 5.5).
able path, albeit one with a few bright spots. Bright spots enlighten this gloomy picture.
Using the methodology of Ewing et al. (2010), one Unexpectedly, 2015 was the first year when global CO2
can compare the world’s ecological footprint and bio- emissions declined after a steady increase over decades
capacity. The ecological footprint is “a measure of how (Jackson et al. 2016). Decreased coal use in China and
much area of biologically productive land and water slower global growth in petroleum and faster growth
an individual, population or activity requires to pro- in renewables were responsible for this reduction. In
duce all the resources it consumes and to absorb the Europe in 2004–2014 waste decreased from 940 to
waste it generates, using prevailing technology and 916 million tonnes. 2 Improvements in physical envi-
resource management practices.” Biocapacity is the ronmental indicators expressing a more efficient use of
ecosystem’s “capacity to produce biological materials inputs and the minimization of negative outputs have
used by people and to absorb waste material gener- a positive impact on the economy because they stim-
ated by humans, under current management schemes ulate production through lower supply costs (lower
117
“ Global biocapacity went into red
nearly half a century ago—but bright
spots enlighten this gloomy picture
5 Figure 5.3
Global biocapacity went into the red nearly half a century ago
4
Global hectares per person
3
Ecological footprint
Ecological reserve
Biocapacity
Ecological deficit
2
0
1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013
Note: Global Footprint Network refers to global biocapacity as “the ecosystems’ capacity to produce biological materials used by people and to absorb waste material generated by humans, under current
management schemes and extraction technologies.” See definition of ecological footprint in the glossary of this report (p. xviii). Read more definitions related to the National Footprint Account at: http://
data.footprintnetwork.org.
Source: Global Footprint Network National Footprint Accounts, 2017 Edition (Global Footprint Network 2017a).
Figure 5.4 Figure 5.5

Higher emission pathways tied to delays in Global peak waste expected in
tackling climate change next century
1,250 12
Total CO 2-equivalent concentrations (parts per million)
Waste generation (millions of tons per day)
Highest emissions pathway (RCP 8.5)

1,150
Shared socioeconomic pathway 3
1,050
9
Shared socioeconomic pathway 2
950
Shared socioeconomic
pathway 1
850
Higher emissions 6
pathway (RCP 6.0)
750
650
3
550 Lower emissions
pathway (RCP 4.5)
450
Lowest emissions pathway (RCP 2.6)
350 0
2000 2020 2040 2060 2080 2100 1900 1950 2000 2050 2100
Note: Each pathway (RPC = Representative Concentration Pathways) has been developed by Note: In the first shared socioeconomic pathway scenario (SSP1), the world’s population
different modeling teams around the world. RCP 2.6 (Netherlands Environmental Assessment of 7 billion people is 90 percent urbanized, development goals are achieved, fossil fuel
Agency) assumes a mid-century global peak in greenhouse gasses with subsequent substantial consumption is reduced and people are more environmentally conscious. In the SSP2
reductions. RCP 4.5 (Pacific Northwest National Laboratory’s Joint Global Change Research (business-as-usual) forecast, the population is 9.5 billion and the urbanization rate is
Institute, United States) and RCP 6.0 (National Institute for Environmental Studies, Japan) 80 percent. In SSP3, 70 percent of the world’s 13.5 billion live in cities, there are pockets of
are stabilization scenarios that assume utilization of technologies and strategies for lowering extreme poverty and moderate wealth and many countries have rapidly growing populations.
greenhouse gas emissions. RCP 8.5 (International Institute for Applies Systems Analysis, Source: Reprinted by permission from Macmillan Publishers Ltd: Nature. Hoornweg, Bhada-Tata
Austria) assumes increasing greenhouse gas emissions over time. and Kennedy, 502, pp. 615–617. Copyright 2013.
Source: Figure by Ilinri (2013) licensed under CC BY 2.0.
118
“ The scale effect is the most
important contributor to emissions
and the use of materials, especially
in emerging economies
costs to reduce pollution) and through higher demand

(part of income can be diverted from pollution con-
for all stages of a product’s life). For manufacturing
goods, consumption-based emissions are higher than
5
trol to the purchase of intermediate or final goods). production-based emissions (see Figure 5.6). From a
Similarly, the world adjusted net savings indicator has sustainability perspective, the level of use of materials

increased since 2008. These are all good signals that per capita is higher in 2013 than in 1995 with a risk of
something is changing positively, but is not enough to depleting current stocks (Figure 5.7).
put us on the right path to sustainability, as seen in The trend of emissions and materials consump-
longer-term trends in the three indicators—and fur- tion can well be understood by using a decomposi-
ther, in trends in manufacturing processes. tion approach that investigates the impact of three
main components (Figure 5.8): the scale effect (the
Increased emissions from manufacturing increase of environmental pressure deriving from
Carbon dioxide emissions and the use of materials increasing value added per capita [for production-
in manufacturing increased between 1995 and 2013 based emissions] or final demand of domestic con-
(Figure 5.6). sumption per capita [for consumption-based emis-
The distinction between production- and con- sions and use of materials]); the intensity effect
sumption-based emissions is important. The former (technological change expressing the decrease of
are those of manufacturing production but do not environmental pressure per each unit of value
include emissions from other sectors involved in the added or consumption); and the composition effect
production process beyond manufacturing. The latter (changes in environmental pressure deriving from
are more reliable in incorporating the genuine carbon variations in the sectoral composition of consump-
footprint of manufacturing goods from a life-cycle tion or production patterns).
perspective (that is, assessing environmental impacts The scale effect is the most important contribu-
tor to emissions and the use of materials, especially
Figure 5.6
Consumption-based estimates of Figure 5.7
global carbon emissions higher than Global use of materials, 1995–2013
production‑based estimates
40
Million tons
25
Million tons CO 2
CO2 consumption-based (of manufacturing products)

20 30
15
20
10
CO2 production-based (of manufacturing sectors) 10
0
0 1995 2000 2005 2010 2013
1995 2000 2005 2010 2013
Note: The figure shows the trend in global consumption-based (of manufacturing products)
Note: Manufacturing sector classification is based on Annex C2, Table C2.2. material use. Manufacturing sector classification is based on Annex C2, Table C2.2.
Source: Mazzanti et al. (2017) elaboration based on the Eora Multi-Region Input-Output Source: Mazzanti et al. (2017) elaboration based on the Eora Multi-Region Input-Output
database (Lenzen et al. 2012; Lenzen et al. 2013). database (Lenzen et al. 2012; Lenzen et al. 2013).
119
“ Higher levels of GDP per capita
tend to reduce the environmental
pressure per unit of value added
or final domestic consumption…
5 Figure 5.8
Decomposition of CO2 emissions per capita growth and materials consumption per capita growth in
the manufacturing sector points to scale effects in especially emerging economies
a. Production-based manufacturing emissions b. Consumption-based manufacturing emissions c. Manufacturing materials use

150 150 150

Growth (percent)
100 100 100
50 50 50
0 0 0
–50 –50 –50
–100 –100 –100

Least Other Emerging Industrialized Least Other Emerging Industrialized Least Other Emerging Industrialized
developed developing industrial economies developed developing industrial economies developed developing industrial economies
countries economies economies countries economies economies countries economies economies
Total growth Growth due to scale effect Growth due to composition effect Growth due to intensity effect
Note: All values are for the period 1995–2013. Industrialization level classification is based on Annex C1, Table C1.2.
Source: Mazzanti et al. (2017) elaboration based on the Eora Multi-Region Input-Output database (Lenzen et al. 2012; Lenzen et al. 2013).
in emerging industrial economies. Least developed This means that at higher levels of GDP per capita
countries show a negative scale effect (except in manu- countries tend to further reduce the environmental
facturing materials use) reflecting the weak growth of pressure per unit of value added or final domestic con-
these countries. sumption. The result is robust across all manufactur-
The intensity effect is generally negative. For ing sectors with some heterogeneity in the size of these
production-b ased emissions, the most advanced coefficients by sector and indicator.
countries show the biggest (negative) intensity For example, the food and beverage sector shows
effect, which is consistent with the idea that indus- a very large elasticity for production- and consump-
trialized economies are better equipped for techno- tion-based emissions and materials use. In the elec-
logical change. For consumption-based emissions trical section the high elasticity of production-based
and materials use, the intensity effect is much more emissions is not accompanied by high elasticity of
equal across country groups, which is consistent consumption-based emissions and materials use. The
with the findings of UNIDO’s 2016 Industrial elasticity of intensity to GDP per capita for mate-
Development Report, which noted an increase in rials use is lower than the elasticity for emissions,
globalization and technological diffusion in the past in part because it is easier to substitute sources of
15 years. energy than materials. If they wanted to, rich coun-
All manufacturing sectors make technological tries could replace fossil fuels with renewable energy
improvements. The elasticity of the environmental to reduce emissions. Replacing materials would be
pressure intensity (as illustrated in Figure 5.9) to GDP more difficult e.g. there are no substitutes for the
per capita is negative for all manufacturing sectors. more than 200 kilograms of steel and 380 kilograms
120
“ …and while it may not
necessarily lead to waste
accumulation it can generate the
benefits of the circular economy
Figure 5.9
Elasticity of the environmental pressure
Figure 5.10
The economy becomes more circular as 5
intensity to GDP per capita in the GDP per capita increases
manufacturing sector

Electrical and machinery
Electrical and machinery
Food and beverages
Food and beverages
Metal products
Metal products
Other manufacturing
Other manufacturing
Petroleum, chemical
and non-metallic
Petroleum, chemical mineral products
and non-metallic
mineral products
Recycling
Recycling
Textiles and
wearing apparel
Textiles and
wearing apparel
Transport equipment
Transport equipment
Wood and paper
Wood and paper
–0.15 –0.10 –0.05 0.00 0.05 0.10
–1.0 –0.8 –0.6 –0.4 –0.2 0.0 Elasticity
Elasticity
Note: All values are for the period 1995–2013 and in constant 2005 PPP$ (PPP is purchasing
Elasticity between CO 2 (production perspective)/value added and GDP per capita power parity). GDP is gross domestic product. The figure captures the sector-specific
Elasticity between CO 2 (comsumption perspective)/final demand and GDP per capita relationship between the share of sector consumption over total consumption in manufacturing
Elasticity between material use (consumption perspective)/final demand and GDP per capita
goods and the logarithm of GDP per capita (from fixed effect estimates including year
Note: All values are for the period 1995–2013. Gross domestic product (GDP) per capita is dummies). It is based on data for 190 countries in the Eora Multi-Region Input-Output
in constant 2005 PPP$ (PPP is purchasing power parity). The figure is based on data for 190 database. See Mazzanti et al. (2017) for technical details on the calculations behind this figure.
countries in the Eora Multi-Region Input-Output database. See Mazzanti et al. (2017) for Manufacturing sector classification is based on Annex C2, Table C2.2.
technical details on the calculations behind this figure. Manufacturing sector classification is Source: Mazzanti et al. (2017) elaboration based on the Eora Multi-Region Input-Output
based on Annex C2, Table C2.2. database (Lenzen et al. 2012; Lenzen et al. 2013) and World Development Indicators (World
Source: Mazzanti et al. (2017) elaboration based on the Eora Multi-Region Input-Output Bank 2017b).
database (Lenzen et al. 2012; Lenzen et al. 2013) and World Development Indicators (World
Bank 2017b).
Box 5.2
Benefits of the circular economy in India
of cement produced each year per capita (UNFCCC
2017). A circular-economy path to development could bring
India annual benefits of $624 billion by 2050 compared
Even for the composition effect there is some
with the current development path, or equivalent to
heterogeneity. Some sectors, such as electrical and 30 percent of India’s current GDP.
machinery and metal products, show a positive coef- In the manufacturing of vehicles designing vehicles
ficient, whereas others (textile and wearing apparel in for reuse, components for remanufacture and materi-
particular) have a negative coefficient (Figure 5.10). als for recycling can close loops and reduce upstream
demand for materials and energy. Remanufactured
Some resource-based industries, such as metal prod-
parts can be 30–50 percent less expensive while hav-
ucts, are characterized by a positive coefficient, mean- ing the same guarantee and quality control as new
ing that at different stages of development countries parts. Remanufacturing a passenger car engine uses
tend to intensify industrial activities towards sectors only 23 percent of the energy used to produce a new
requiring resources. A positive coefficient for the recy- engine from raw materials.
cling industry may indicate that higher levels of GDP Source: Ellen MacArthur Foundation (2016).
per capita may not necessarily lead to waste accumula-

tion but can generate the benefits of the circular econ-
omy (Box 5.2).
121
“ In 1988–2015 the share of
environmental goods in total
exports increased in both developed
and developing countries
5 Using environmental goods on the

path to sustainability
Figure 5.11
Export share of intermediate environmental
goods on the rise
10
Percent
Monitoring the consumption of
environmental goods 8
To monitor environmental goods, the OECD list of 6

environmental goods can be used (Steenblik 2005).3
Its categories of environmental goods can be divided 4
into three groups: pollution management, including 2

items such as catalytic converters or chemical recov-
0
ery systems; cleaner technologies and products; and 1988 1990 1995 2000 2005 2010 2014
resource management, with an emphasis on water sup- High-income economies Middle- and low-income economies
Note: Environmental goods and income classifications are based on, respectively, Steenblick
ply, renewable energy, and so on. These goods broadly (2005) and Annex C1, Table C1.3.
represent products or processes adopted by industries Source: UNIDO elaboration based on the United Nations Comtrade database (UNSD 2016a) and
World Bank income classification based on Atlas (World Bank 2016b).
to reduce pollution and final household goods.
In 1988–2015 the share of environmental goods
in total exports increased in both developed and
developing countries. Environmental goods now rep- Box 5.3
Measurement problems on the impact of
resent a relevant market segment but despite a grow- environmental goods
ing trend the share of trade of these goods remained The lack of standardized classifications of environ-
small, up to 8 percent (Cantore and Cheng 2017; see mental goods is accompanied by difficulties in track-
Figure 5.11).4 ing the environmental impact of environmental goods
The monitoring of final environmental goods is because:
• There is not a straightforward way to track if a
complicated. In organic farming, for example, produce
product is environment-friendly for every envi-
raised using environment-friendly techniques is recog- ronmental indicator. Just as a mere example an
nized as organic only if a farmer chooses to be part energy-efficient refrigerator can still remain prob-
of a certification system. Many farmers in low- and lematic in terms of waste disposal or materials
use.
middle-income countries lack easy access to interna-
• A comprehensive analysis of the impact of envi-
tional market systems. ronmental goods should incorporate an analysis of
Following aggregated consumption trends of the environmental pressure based on a life cycle
all environmental goods is virtually impossible. No analysis approach, tracking the environmental
internationally recognized dataset tracks all the envi- impact of all the production process steps. The life
cycle analysis could be very complicated in practi-
ronment-friendly variants of each product. However,
cal terms.
the literature abounds on the attitude of individuals • There may be uncertainty in the environmental
towards final goods, where the environmental attrib- impact of environmental goods as ecological pro-
ute is explicitly manifested through certification, cesses may be very complex. It would be difficult
labelling or marketing, and can still tell us quite a to analyse to what extent their impact is sufficient
to transition towards a sustainable virtuous circle.
lot about the diffusion of final environmental goods.
Uncertainty does not allow calculating exactly the
Moreover, even if diffusion of environmental goods as needed environmental improvement to reduce the
an aggregate could be tracked, it would be difficult to risk of big damages and disasters.
analyse to what extent their penetration is sufficient
to activate a transition towards a virtuous sustainable
circle of demand (see Box 5.3).
122
“ People in developing countries
are far more concerned about
the environmental impact of
their consumption than people
in high‑income countries
Demand for environmental goods in

developing countries
than do people in high-income countries (Pontoni
and Bruschi 2017).
5
The hypothesis of the “environmental Kuznets curve” According to a survey by The Nielsen Company
is that at higher levels of income, consumers tend to (2015), it is harder to convince consumers to buy or pay

reorient consumption towards environmental goods. more for sustainable products in developed markets than
Despite some evidence that the income elasticity of in Latin America, Asia, the Middle East and Africa,
environmental goods is greater than one (Ghalwash where consumers are 23–29 percent more willing to pay
2008), the issue remains controversial. The hypothesis a premium for sustainable goods than rich countries.
that environmental quality is a luxury good does not
consider that poor people are most directly affected Environmental goods—work in progress
by the quality of environmental resources. And the towards massification
evidence shows that there is no clear divide between Many final environmental goods are not fully massified,
high- and low-income countries towards the environ- such as those from organic farming. The definition of
ment (Padilla 2017); environmental awareness and organic agriculture by the International Federation of
the willingness to act in environment-friendly ways Organic Agriculture Movement fits our concept of envi-
are not lower in emerging economies than in indus- ronmental goods as it reduces environmental impact in
tralized ones. According to the Greendex Survey, peo- terms of soil, groundwater, climate change and biodiver-
ple in developing countries are far more concerned sity (Box 5.4).6 Some sources report that food has the
about the environmental impact of their consump- biggest ecological footprint because of its larger impacts
tion than people in high-income countries (Figure in production and consumption (WBCSD 2008).
5.12).5 People in developing countries also report feel- The world sales market of organic products rose
ing guiltier about their impact on the environment from $15 billion to $80 billion in 1999–2014, with
Figure 5.12
Consumer attitude: How guilty do you feel about your impact on the environment and do you try to
reduce it?
a. Greendex score vs. guilt about impact on environment b. Greendex score vs. efforts to reduce environmental impact
Greendex score
Greendex score
High Greendex score/ High Greendex score/ High Greendex score/ High Greendex score/
Not very guilty Very guilty Not trying Trying
India India
China
Republic China Republic
of Korea Brazil of Korea Argentina
Brazil
Hungary Mexico Hungary Mexico
Argentina
Russian Federation Russian Federation
Spain Spain South Africa
Germany South Africa Germany
Sweden Sweden
Australia Australia
France United Kingdom France
Japan United Kingdom
Japan
Canada
Canada
United States United States
Low Greendex score/ Low Greendex score/ Low Greendex score/ Low Greendex score/
Not very guilty Very guilty Not trying Trying
5.2 55.5 15.9 78.4
Feeling guilty about own impact on environment Trying to reduce environmental impact
Note: The Greendex 2014 survey examined environmentally sustainable consumption based on the results of online interviews with approximately 1,000 consumers in each of the 18 countries.
Source: National Geographic and GlobeScan (2014).
123
“ Beyond price, the lack of
environmental awareness is
not the only reason to explain
consumer resistance to
buying organic products
5 Box 5.4
Organic products as environmental goods: The environmental impact of organic farming
According to the FAO, organic farming delivers environ- In air and climate change, organic agriculture reduces
mental benefits from many points of view. non-renewable energy use by decreasing the use of chemi-
For the soil, practices such as crop rotation, inter- cal fertilizers and pesticides (these require high quanti-
cropping, symbiotic associations, cover crops, organic ties of fossil fuel to be produced). Organic practices also
fertilizers and minimum tillage encourage soil fauna and contribute to mitigating the greenhouse effect and global
flora, improving soil formation and structure and creating warming through their ability to sequester carbon in the soil.
more stable systems. Organic farmers promote biodiversity at various lev-
Pollution of groundwater from conventional agricul- els. At the general level, traditional and adapted seeds and
ture with synthetic fertilizers and pesticides is mitigated breeds are preferred for their greater resistance to dis-
by organic agriculture, which replaces synthetic fertilizers eases and their resilience to climatic stress. At the species
and pesticides with organic fertilizers (e.g. compost, ani- level, diverse combinations of plants and animals optimize
mal manure and green manure) and adopts greater bio- nutrient and energy recycling for agricultural production.
diversity (species cultivated and permanent vegetation),
Source: FAO (n.d. b).
improving soil structure and water infiltration.
90 percent in North America and Europe. Retail prices one recent study (IEA 2016), even if new registrations
of organic products are normally more expensive than of electric cars (battery electric and plug-in hybrids)
conventional products. As the diffusion of manufac- increased by 70 percent from 2014 to 2015, vehicles
turing goods heavily depends on price and usability of sold worldwide would still reach only 550,000 in
products and on country characteristics, even in many 2015. A few countries such as Norway aside, the mar-
countries in North America and Europe the share of ket share of electrical vehicles is minuscule (Figure
organic sales in total sales never goes beyond 8 per- 5.14), because of cost and lack of infrastructure.
cent of total consumption (Figure 5.13). Consumers These examples show that many environmental
exposed to the choice of organic certified food com- goods are taking long to reach the production scale
pared with conventional food frequently continue for manufacturing’s sustainable virtuous circle. Only
to orient their selection towards conventional food if environmental goods were produced on a massive
because of this price effect, and so price is an impedi- scale like conventional goods will the virtuous circle
ment as it is too high to attract enough demand to of manufacturing consumption become sustainable.
stimulate the transition from market segment to full Until 2013, light-emitting diode (LED) lamps rep-
massification (and the related virtuous circle). The resented small market segments characterized by high
Food and Agriculture Organization (FAO) of the production costs. Up to 2013 the market share in a set
United Nations provides reasons why organic agricul- of high-income countries only just reached 15 percent
ture is more expensive than conventional food, includ- in Australia and is below 5 percent in countries such
ing that organic farming can be less productive than as the United Kingdom and the Republic of Korea
conventional farming (FAO n.d. a, Ponisio et al. 2015). (World Bank 2016a).
Beyond price, the lack of environmental awareness The ban of incandescent lamps in the United States
is not the only reason to explain consumer resistance and other world countries and the continuous decrease
to buying organic products. Social, economic and cul- of production costs is stimulating a staggering increase
tural drivers also matter such as ethical values, sense of the LED market share and rapid phase-out of tradi-
of community or the macroeconomic context (Misra tional lamps (see Navigant Consulting 2014, Wu 2016).
and Singh 2016). The technical literature on consumers’ purchasing
Similar considerations apply to electrical vehicles. behaviour shows price to be one of the most impor-
Electrical vehicle penetration is very low. According to tant deterrents to consumers (Aschemann-Witzel
124
“ Organic products and electric
cars are still non‑massified goods—
price is an impediment preventing
the transition from market
segment to full massification
Figure 5.13
Organic consumption still a market segment in developed nations 5
8
Organic market share (percent)

6
0
d
ia
en
rg
ly
tia
um
nia
ay
ain
hia
nia
ia
kia
ark
ga
an
nd
ar
nc
tvi
an
lan
lan
Ita
str
an
ou
rw
oa
ed
va
ve
Sp
ec
ma
rtu
ng
nm
lgi
La
rm
rla
Fra
erl
hu
Fin
Po
Au
mb
No
Cr
Sw
Slo
Slo
Cz
Be
Hu
Po
the
Ro
itz
Ge
De
Lit
xe
Sw
Ne
Lu
Note: All values are for 2015 and are in million $.

Source: Willer and Lernoud (2017).
Figure 5.14
Rising demand for electrical cars still to be manifested in market share
2010 2011 2012 2013 2014 2015 Market share, 2015

250 25
New electric car registrations (thousands)
Market share (percent)
200 20
150 15
100 10
50 5
0 0
China United States Netherlands Norway United Kingdom Japan Germany France Sweden Others
Source: © OECD/IEA [2016] Global EV Outlook, IEA Publishing. Licence: www.iea.org/t&c; as modified by UNIDO. Includes data by the European Fuels Observatory, www.eafo.com.
125
“ Environmental goods
can be palatable even when
their price is higher than that
of conventional goods
5 Figure 5.15
Increasing penetration rate of high-efficiency refrigerators
100
Percent
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A+++ A++ A+ A B C
Note: See endnote 3.

Source: Topten (2015).
et al. 2014). Of course, the price itself is not a stand- materials or entails extra marketing costs. When the
alone factor. LED lights have been more expensive consumption of goods is price elastic, people tend to
than other options for years, but labels explaining orient their preferences towards cheaper goods. In
product characteristics—such as longevity—g ave other words, consumers are not always willing to pay a
consumers the confidence to purchase more efficient premium for the environmental attribute, which helps
LED lamps for the first time (World Bank 2017a). explain why environmental goods can take longer to
Some consumers might choose LED lamps not for penetrate the market.
their environmental attributes (such as the smaller As with lamps, the price for many environmental
impact of greater energy efficiency on the environ- goods is decreasing. For electric vehicles and their bat-
ment) but for a non-environmental benefit (such as teries (which can make up a third of the vehicle’s pro-
longevity). duction cost) their price is coming down and could be
Another positive picture comes from refrigerators, set to do so even more dramatically. In 2030 the cost
where the most energy-efficient classes (A+++, A++ —in 2016 at $273 per kilowatt hour—will drop to less
and A+) have lifted their penetration of the European than $100, which could propel annual electric vehi-
Union market (Figure 5.15). cle sales to about 600 million cars in 2040 (Randall
2016).
Prices of environmental goods—generally Environmental goods can be palatable even when
higher their price is higher than that of conventional goods.
As with organic food, the price of environmental With refrigerators, class A+++ products are gaining
goods is often higher than that of conventional prod- market share even though this category is expensive,
ucts. The production of environmental goods often no doubt given consumers’ expectation of energy sav-
requires a different production process, different ings over the longer term (Figure 5.17). The cost of
126
“ The cost of goods along the
whole life cycle of products is
what often attracts consumers
Figure 5.16
Projections of electric vehicles and cost of lithium-ion battery packs 5
600 1,250
Number of vehicles (millions)
Cost of lithium-ion battery packs ($ per kilowatt-hour)

Projected annual sales

Cumulative sales
500
1,000
Actual
400
750
300
500
200
250
100 Estimated
0 0
2011 2015 2020 2025 2030 2035 2040 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Source: Bloomberg New Energy Finance (2017).
Figure 5.17
Average prices of refrigerators sold in the European Union, 2004–2014
800
Average price of refrigerators (euros)
700
600
500
400
300
200
100
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
A+++ A++ A+ A B
Note: All values are in EUR for energy classes A+++ to B. Regulation also played a major role in the refrigerators market. In 1999 class D, E and F refrigerators were banned by the European Parliament.
In 2010 classes less efficient than A were banned. The most recent ban concerns class A refrigerators. Nonetheless, among the classes A+, A++ and A+++, A+++ refrigerators could gain market
despite their highest price.
Source: Topten (2015).
127
“ Biases may affect consumer
behaviour. Some consumers may
remain unconvinced of the need
to protect the environment
5 Figure 5.18
Widening environmental footprint from consumption as wealth rises
300
Index (1980 = 100)
GDP
250
Total extraction
200
Population
150
100
Material intensity
50
1980 1985 1990 1995 2000 2005 2010 2013
Note: GDP is gross domestic product.

Source: Padilla (2017) elaboration based on the Global Material Flow database (WU 2015) and World Development Indicators (World Bank 2017b).
goods along their whole life cycle is what often attracts acquire the necessary information about the impact of
consumers. environmental goods on the environment. Third, they
Low prices of environmental goods can sometimes buy the good.
go against sustainability. The production of goods is Biases may affect consumer behaviour. Some con-
becoming more efficient because of technology effects sumers may remain unconvinced of the need to pro-
(UNIDO 2015b). The Jevons effect states that tech- tect the environment. According to a report by the
nological change is good for the environment because OECD (2014), more than 40 percent of respondents
it generates efficiency in the use of resources but may in Australia, Japan and the Netherlands believe that
also result in a bigger negative effect when lower prices “environmental impacts are frequently overstated,”
induced by technological change stimulate further and more than 20 percent of respondents in Japan
resources consumption. and Spain believe that “environmental issues should
Figure 5.18 shows an increase of technology effi- primarily be dealt with by future generations.” These
ciency (a decreasing material intensity, blue line) in the consumers are unlikely to buy goods because they have
use of materials accompanied by a growing demand environment-friendly attributes.
of resources (an increasing total extraction, red line). Even consumers who are sensitive to environmen-
This provides suggestive—a lthough non-definitive— tal issues may not purchase environmental goods.
support for this hypothesis. According to a survey by Greendex, large shares of
respondents in developed and developing countries
Environmental awareness and purchasing are sceptical that consumer behaviour can improve
behaviour the environment; this view is widespread in large
Consumers considering buying an environmental middle-income countries such as China and India
good go through three stages. First, they become (Figure 5.19).
aware of the environmental threat and become keen Provided that consumers care about the environ-
to help mitigate it through consumption. Second, they ment and think that consumption can be an option to
128
“ The lack of trust among
producers and consumers
represents another market
factor that is a key obstacle in
marketing environmental goods
Figure 5.19
Consumer attitude: There is very little
economic benefits of energy-efficient refrigerators
(Galarraga et al. 2011). A labelling system would have
5
individuals can do to reverse the impact of
society on the environment been more effective if it had contained more informa-
tion on the monetary gains for consumers. The 2011

Japan 2 11 33 13
Sweden 7 15 25 14 Industrial Development Report states that the Energy

United States 5 17
Canada 7 17
28
28
19
15
Star international standard for rating energy efficiency
Australia 6 18 25 13 of manufacturing products has influenced consumer
United Kingdom 5 22 23 11
choice over its 25 years of existence.
Spain 9 21 21 12
France 7 24 23 13 Yet appropriate labelling and marketing can also

South Africa 12 20 21 16
be an enormous vehicle of firms’ profits. A survey by
Mexico 18 21 17 20
Germany 12 27 19 9
The Nielsen Company (2015) shows that only firms
Argentina 19 20 17 17 representing 4 percent of total revenues among all
Brazil 20 21 15 21
Republic of Korea 11 32 18 5
brands did not take any steps to advertise environ-
Hungary 17 26 15 8 mental attributes through campaigns (the “marketing-
India 21 29 15 7
only” category) or through explicit claims expressed as
China 22 35 11 5
Russian Federation 38 28 8 4 labels or other forms of written information on the

Total (18 countries) 13 22 20 12
product package (“claim only,” Figure 5.20). Those
Strongly agree (5) 4 2 Strongly disagree (1) firms showed the lowest growth rate of total revenues
Note: The white space represents the portion of respondents who answered “3” (on a scale of
1 to 5), answered “Do not know” or did not answer at all. The Greendex 2014 survey examined
in 2014 (0.9 percent).
environmentally sustainable consumption based on the results of online interviews with The lack of trust among producers and consumers
approximately 1,000 consumers in each of the 18 countries.
Source: National Geographic and GlobeScan (2014). represents another market factor that is a key obstacle
in marketing environmental goods. Recent scandals in
the car industry have further lowered consumer con-
help to improve the environment, they need to acquire fidence in environmental claims for manufacturing
the necessary information on the environmental goods. The Greendex survey of 2010 (see footnote 11
goods and on their purchase costs. Consumers need for details on the survey) shows that consumers widely
to understand the attributes of products, via informa- agreed that companies make false environmental
tion, but are not always in a position to acquire and claims for their products.
use it. In the case of energy-efficient refrigerators, cru-
cial information would be to understand the energy Policies to minimize barriers and
savings obtained by buying an environmental prod- stimulate drivers for sustainable
uct. A study shows that the price premium paid for the consumption
highest energy-efficiency label in the refrigerator mar- Mainstreaming sustainable development into national
ket of the Basque Autonomous Community in Spain plans and global policy frameworks into national
is about €60 (~ $84), or one-third of the value of the strategies may be the best way to accomplish Agenda
“energy savings” gained by consumers (Galarraga et al. 2030. Policies are needed to reduce barriers (such as
2011). high prices and lack of awareness) and reinforce driv-
Labelling and certification are crucial for high- ers in the sustainable virtuous circle of manufacturing
lighting the environment-friendly attributes of prod- consumption (Box 5.5). Policies can be market based if
ucts. In Spain the gap between consumers’ willing- they use markets, prices and other economic variables
ness to pay for energy-efficient refrigerators and their to reduce negative externalities or command and con-
monetary gain from more energy-efficient appliances trol policies that are the direct regulation of an indus-
meant that consumers were not fully aware of the try by legislation.
129
“ Mainstreaming sustainable
development into national plans
and global policy frameworks into
national strategies may be the best
way to accomplish Agenda 2030
5 Figure 5.20
Higher growth in companies adopting pro-environmental campaigns
Claim only 2 75
Percent
None 4 Value share among
brands measured
Growth
50
Claim and
marketing
29
Marketing only
65 25
0
Marketing Claim and None Claim
only marketing only
Note: The left figure shows the percentage of total sales generated by companies adopting pro-environmental campaigns, and the right figure shows the consequent growth of revenues of those
companies.
Source: The Nielsen Company (2015).
Box 5.5
The importance of policies for the domestic market of environmental goods
Empirical evidence produced by UNIDO (Cantore and such as environmental goods when they are able to inno-
Cheng 2017) shows that policies have a statistically sig- vate. The finding on environmental taxes means that when
nificant impact on the domestic market of environmental environmental taxes are set in an importer country, the
goods.1 Using a panel of 71 countries (38 developed coun- effect is to reduce imports of environmental goods to
tries and 33 developing countries) in 1988–2015 the deter- stimulate a domestic market. Countries accommodate the
minants of international exchange of environmental goods increasing demand of environmental goods generated by
(as defined by the OECD classification) are analysed. A taxes with higher levels of domestic production of envi-
gravity model framework provides support to the idea that ronmental goods rather than with more imports of these
the exchange of environmental goods depends on the goods.
GDP of the importer, the GDP of the exporter and their
otes
N
geographical distance. Geographical distance approxi- 1. Industrial Development Report 2016 discussed market instruments as ways to promote tech-
mates transaction costs. nological change, especially on the production side. It emphasized the cost-effectiveness
of market instruments compared with “command and control” policies imposing limits on
The model provides evidence that exports of envi- pollution (UNIDO 2015b).
ronmental goods grow as the innovation activity of the 2. As defined by OECD (2017a) environmental taxes are an important instrument for govern-
ments to shape relative prices of goods and services. The characteristics of such taxes
exporter is bigger and imports are reduced when envi- included in the database (revenue, tax base, tax rates, exemptions, and so on) are used
ronmental taxes are higher. 2 The former result is quite to construct the environmentally related tax revenues with a breakdown by environmental
domain (water use, water pollution, waste, certain chemicals, and so on). In addition, the
straightforward because it would flag that countries are data have been cross-validated and complemented with revenue statistics from the OECD
more equipped to export relatively emerging technologies Tax Statistics database and official national sources.
130
“ Consumers and producers
may be in conflict over who
should bear the tax burden
Market policies
The logic behind policies aimed at incentivizing sus-
issues should not cost households extra money
(OECD 2014). In China sales of electric and plug-
5
tainable consumption though market mechanisms is in hybrid cars quadrupled to 351,000 from 2014 to
based on the idea that policy-makers have direct con- 2015, boosted by a range of government subsidies to

trol to steer demand in some desired direction (see consumers (Box 5.6). Producers also benefit from
Chapter 6 for a taxonomy of demand-driven indus- government support. The incentive package increased
trial policies). The environmental economics literature sales of electric vehicles, but the cost-effectiveness of
suggests that in many cases market policies are more the producer subsidies has been controversial. In 2012
cost-effective tools than regulation for environmental and 2014 these subsidies exceeded producers’ profits
protection. on electric vehicles.
There are many examples of taxes on consump-
tion of polluting final goods. In 2002 Ireland imposed Regulation
a €0.15 tax on plastic bags in retail stores (previously Yet an increase of the market for, or consumer interest
bags had been free) (Convery et al. 2007). The effect in, environmental goods may not be enough to reach
was a 90 percent reduction in their use and reduced a sustainable path, which requires regulations both
waste and littering. The costs of administration were to set numerical targets or standards and to internal-
very low (about 3 percent of revenues), because it was ize the negative externalities of pollution. Between
possible to integrate reporting and collection into 1990 and 2008 an amendment of the Clean Air Act
existing value-added tax systems. Store owners and in the United States accounted for 60 percent of the
consumers had a very positive reaction to the intro- reduction in air pollution emissions despite a substan-
duction of this tax, probably because the main actors tial increase in manufacturing output (Shapiro and
hurt by the reform were the plastic bag producers. Walker 2015). The power of regulation should not be
The introduction of a tax on the consumption of overlooked.
polluting goods is more problematic when it affects
a more organized and powerful category of produc- Green public procurement
ers. The purchase of cars in Denmark, for example, Similarly, governments may also directly affect
is subject to a registration tax and a green owner tax. demand for manufacturing goods as a direct consumer
The annual green owner tax is based on how energy- (and see Chapter 6). The public sector is the largest
efficient the vehicle is. It ranges from €2,740 (for cars consumer of goods and services in many countries.
that get less than 4.7 kilometres per litre) to €83 (for
cars that get more than 20 kilometres per litre). The Box 5.6
Incentivizing electric cars in China
concept originated from research claiming that con-
sumption-based environmental taxes should be based Sales of electric and plug-in hybrid cars in China
on the polluting impact of the good (Albrecht 2006). reached 351,000 units in 2015 (four times higher than in
The Danish policy led to a sharp increase in the num- 2014), boosted by a range of government subsidies to
ber of energy-efficient cars registered between 1997 consumers. The producer, too, benefits from govern-
ment support.
and 2014, but it was severely criticized by producers,
Whereas the impact of the incentive package had
who claimed that it created uncertainty and instabil- a positive impact on purchases of electric vehicles, the
ity in the market, which hurt their profits. cost-effectiveness of subsidies for producers is con-
Consumers and producers may be in conflict troversial. In 2012 and again in 2014 subsidies were
over who should bear the tax burden. The majority of greater than the producers’ profits on electric vehicles.
respondents to an OECD survey agreed with the fact Source: Clifford (2016).
that government policies to address environmental

131
“ Governments may also directly
affect demand of manufacturing
goods as a direct consumer
5 In the European Union, public expenditure on goods

and services account for around 13 percent of GDP,
strategies or policies to support green public procure-
ment (OECD 2015).
some €1.8 trillion annually (Padilla 2017).
Given such volumes, governments can influence International bodies
markets. Choosing goods and services with reduced Agenda 2030 incorporates sustainable production and
environmental impact, they can make a major con- consumption as a specific objective (SDG 12), implicitly
tribution to local, national and international sus- acknowledging that the previous path was unsustaina-
tainability goals (European Commission 2016). ble: “Current trends towards sustainability are welcome
Governments are increasingly orienting to invest- but insufficient … despite best efforts, incentives for busi-
ments that follow sustainability criteria. According ness investment are not sufficient. Collaboration across
to a survey conducted by the United Nations value chains is deficient. Public policy frameworks are
Environment Programme (2017) 38 of 41 (93 per- neither ambitious enough nor adequately coordinated at
cent) responding world national governments include the global level” (World Economic Forum 2010).
sustainable public procurement in policies and strat- The Montreal Protocol, however, has been a
egies. Ninety-four percent of OECD countries use real success. Changes on international regulation of
Box 5.7
The Montreal Protocol: 30 years of influencing consumption and production patterns
In 2000 UN Secretary General Kofi Annan stated: “Per- innovation. One of its basic principles is to intervene in the
haps the single most successful international environmen- production and supply of chemicals rather than at the level
tal agreement to date has been the Montreal Protocol, in of emission sources.
which states accepted the need to phase out the use of Goods produced with ozone-neutral processes,
ozone-depleting substances (Annan 2000, p.56).” In its first including asthma inhalers, vegetables, insulation materials
30 years, this agreement achieved the almost total phase- and cooling devices, are of the same or even better qual-
out of five groups of ozone-depleting substances (chloro- ity than the products they replaced. This achievement is
fluorocarbons, halons, carbon tetrachloride, methyl chloro- particularly notable in the refrigeration and air conditioning
form and methyl bromide). It reduced the consumption and sector. As emerging markets grow, more and more people
production of hydrochlorofluorocarbons by 40 percent, can afford cooling appliances (50 million air condition-
with a view to phasing them out entirely by 2030. With the ing units were sold in China in 2010 alone). Despite the
amendment adopted in Kigali in November 2016, the Mon- growing global demand for cooling technologies, manu-
treal Protocol includes hydrofluorocarbons in the group of facturing and chemical industries have not compromised
controlled substances and regulates their phase-down, on environmental considerations. Thanks to the Montreal
extending its mission to mitigating climate change. Protocol, they are still striving for benign and energy-effi-
Phasing out ozone-depleting substances has been a cient solutions.
challenge for all countries. But it has also been an oppor- Several factors explain the success of the Montreal
tunity to introduce state-of-the-art technologies and bet- Protocol. They include:
ter resource management methods and to improve energy • Easily identifiable and measurable environmental
efficiency and competitiveness. Although the Montreal benefits.
Protocol does not explicitly mention sustainable con- • Global engagement, following differential treatment of
sumption, it secured changes to consumption and pro- developed and developing countries.
duction patterns at the country level. It created a huge • Special institutional set-up, including a dedicated
new international market for chemical products and equip- funding mechanism to assist developing countries
ment that replace ozone-depleting substances. Industry and transition economies, and overall global institu-
developed a wide range of technologies. The protocol’s tional support.
strong policy framework is based on shared responsibili- • Defined phase-out schedules with relatively easily
ties between governments and industry that allow indus- achievable interim targets.
try to plan for the long term and encourage research and • Close involvement of industry.
132
“ A global target for sustainable
consumption represents a unique
opportunity to engage the main
actors involved in a radical change
of current consumption patterns
Table 5.1
Diffusion of the EU Ecolabel in EU countries 5
Share of people who
have seen, heard of

Number of Number of Number of or bought Ecolabel
Year companies licences products products (percent)
2001 83 95
2002 128
2003 166
2004 224
2005 250 279
2006 386 11
2007 514
2008 754
2009 1,015 37
2010 1,064
2011 887 1,357 18,935
2012 > 1,000 1,671 17,176
2013 2,086 37,215
2014 1,910 43,157
2015 2,031 44,711
Source: Evans et al. (2015).
production were key drivers to stimulate different sus- are rarely in a position to activate coordinated
tainable consumption patterns (Box 5.7). action globally.
The success of the Montreal Protocol notwith- • Multilateral agreements may not generate enough
standing, international organizations and agreements impact to activate a sustainable path.
face many challenges: A global target for sustainable consumption rep-
• Multilateral agreements often focus on a specific resents a unique opportunity to engage international
environmental problem and cannot tackle the dif- organizations, governments, businesses and civil soci-
ferent issues of sustainable consumption as a whole. ety to organize for a radical change of current produc-
• Countries tend to free ride (Barrett 1994). tion standards and consumption patterns. This will
Multilateral agreements may not be enough to stimulate the main actors involved in the process (con-
reach a sustainable path. sumers, firms, policy-makers and international organi-
• International organizations can help implement zations) to contribute in rendering the virtuous circle
multilateral agreements and/or support domestic of the manufacturing consumption environmentally
policies at the country or regional level, but they sustainable.
133
5 Notes
1. This definition is inspired by the Oslo Symposium The Industrial Development Report 2018 graph
of 1994, which states that sustainable consump- of environmental goods still shows that environ-
tion and production is “the use of services and mental goods are a small market segment, but it
related products, which respond to basic needs also shows that the share may reach up to 8 per-
and bring a better quality of life while minimiz- cent and an increasing trend in developed and
ing the use of natural resources and toxic materi- in developing countries. Industrial Development
als as well as the emissions of waste and pollut- Report 2018 relies on broader country coverage
ants over the life cycle of the service or product (147 countries vs. 70 countries in the 2016 report).
so as not to jeopardize the needs of future gen- 5. The Greendex survey asks 18,000 consumers
erations” (Norwegian Ministry of Environment in 18 countries about their energy use and con-
1994). servation, transportation choices, food sources,
2. According to European Commission statistics the use of green versus conventional products, atti-
main source of scrap in Europe is the construction tudes towards the environment and sustainabil-
sector (33 percent). Manufacturing accounts for ity and knowledge of environmental issues (see
about 10 percent, mining 30 percent and house- http://environment.nationalgeographic.com/
holds 8 percent. environment/greendex/).
3. As emphasized in Steenblick (2005), the OECD 6. “A production system that sustains the health of
list of environmental goods is far from being soils, ecosystems and people. It relies on ecological
exhaustive and does not cover all environmental processes, biodiversity and cycles adapted to local
goods. conditions, rather than the use of inputs with
4. This graph (covering selected years on the basis adverse effects. Organic Agriculture combines
of data cleaning) updates Industrial Development tradition, innovation and science to benefit the
Report 2016 estimates finding that environ- shared environment and promote fair relation-
mental goods represent up to 5 percent of total ships and a good quality of life for all involved”
exports in developed and developing countries. (IFOAM 2005).
134
Chapter 6
Demand-driven policies to foster

manufacturing in developing
countries: Can they be
inclusive and sustainable?
Rationales for demand-driven affected by industrial policy. Factors such as the size
industrial policy interventions of the economy and the domestic market, the strength
The virtuous circle of manufacturing consumption of domestic technological and manufacturing capa-
involves a recursive process of income generation, bilities, the relative endowment of resources with high
product diversification, quality upgrading, mass value for manufacturing, the extent of international
consumption and changes in volumes and relative collaboration and forms of insertion into value chains,
prices of manufacturing products as well as links to the relative weight of domestic or external markets
innovation, production efficiency and productivity and even the definition of and balance between often
gains. Various factors—including gains in disposable conflicting policy priorities can determine the ability
incomes, the contributions of domestic and exter- to use demand as a driver of growth.
nal markets and the interactions between systems of If demand for manufactured goods is a framework
supply and demand as drivers of industrialization— condition, governments can play at least three distinct
determine whether the circle is set in motion. roles. They can:
The preceding chapters highlight the opportuni- • Facilitate the correction of market failures, so that
ties as well as the trade-offs associated with the dif- domestic firms can build on current comparative
ferent stages of the circle. They offer guidance on how advantages to take advantage of emerging demand
to make the circle inclusive and sustainable. They opportunities.
also identify the trade-offs between the promotion • Promote technological change and the building of
of demand for manufacturing and the building of productive capacities, so that domestic firms can
domestic manufacturing capabilities, or the challenges enter sectors that they would otherwise be unable
to balance between domestic and external demand for to develop given the country’s traditional compar-
manufactured products. Likewise discussed were the ative advantages.
tensions between massification, diversification and • Develop capacities such as technological fore-
commodification of manufacturing exports. sight services, to help domestic firms identify or
This chapter illustrates how policy-makers in anticipate changes in demand for manufacturing
developing countries have used policy interventions products.
to address some of these trade-offs. Building on case If demand for manufactured goods is responsive to
studies in Africa, Asia and Latin America, it explores active policy intervention, governments can play four
some policy responses to the dynamics of demand for roles. They can be:
manufactured goods as a driver of industrialization. • Information providers and awareness raisers
The findings indicate that in addition to changes in who signal not only market opportunities but
demand for manufactured goods, changes in institu- also desired directions for industrialization and
tional frameworks and public policy or technological consumer behaviour related to manufacturing
innovation can lead to enhanced—a nd sometimes products.
unexpected—opportunities for industrialization. • Regulators.
Minimum productive capacities are needed to be • Generators or co-generators of innovation.
ready to react to them. • Consumers of manufactured goods (through pub-
Demand for manufactured goods can be a frame- lic procurement).
work condition, partially or completely outside the The chapter shows that demand-driven policy
control of policy-makers, or a variable that can be instruments are heterogeneous and can be tailored to
135
“ Improved income distribution,
fighting poverty and a thriving
middle class can enhance domestic
markets for manufacturing goods
6 suit different government roles and development out-

comes. These instruments are best understood within
for new or improved manufactured goods exists or
can be fostered or otherwise created. Only in such a
complex policy mixes, in interaction with supply- way are the dynamics of industrial development pos-
driven interventions. Policy-makers need to consider sible and sustainable (Saviotti 2001, Saviotti and Pyka
Demand-driven policies to foster manufacturing in developing countries
synergies between industrial and other broader devel- 2013).

opment policies with implications for the direction Modern approaches to industrial policy highlight
and pace of industrialization. Governments need to the need for enhanced synergies as well as mindfulness
set clear priorities and goals and be aware of possible of trade-offs between industrial and other policies. As
trade-offs between policy tools and intended targets. noted in Industrial Development Report 2016, policy-
Enhanced monitoring and evaluation is needed to bet- makers face the challenge of delivering “win-win-win
ter codify experiences in the use of such instruments. solutions, simultaneously balancing growth, environ-
Traditional economic goals remain top priorities mental and social concerns,” all of which are both
for policy-makers. However, consistent with modern key ingredients in and outcomes of industrialization
approaches to industrial policy, this chapter acknowl- (UNIDO 2015b, p.148). Decisions made by a minis-
edges growing concerns about inclusiveness and envi- try of industry can have effects on areas such as health,
ronmental sustainability. The goals are to ensure that and decisions made by ministries of health or other
industrialization better serves the poor and incor- social sectors can uncover the need for interventions
porates segments of the population that have been to promote development of manufacturing activities
excluded from consumption of manufacturing prod- (Shadlen and Massard da Fonseca 2013). Bridges for
ucts by geographical dispersion, social fragmentation some gaps in manufacturing capacities are needed to
or political disenfranchisement. provide goods and services of high societal value.
This chapter provides evidence on the use of indus- Stiglitz (2017) recommends demand-driven indus-
trial policy tools to influence demand for manufac- trial policies to enhance diversification and promote
turing. Some tools are well established, although the economic transformation. Initiatives to improve
objectives they pursue can be broader than in earlier income distribution, fight poverty and help the mid-
years. Other tools have been redesigned to match dle class thrive should help increase the size of domes-
specific goals. New tools or approaches are also being tic markets for manufacturing products. This chapter
explored, with varied degrees of adherence to current provides evidence on the ways in which policy-makers
rules governing international trade and investment. have implemented or are implementing demand-
driven industrial policies to tackle some challenges
The policy framework stemming from an increasingly complex multiplicity
The process of structural transformation—a term of development goals linked to industrialization.
commonly used to describe the evolution from an
agriculture-based economy to a more diversified, tech- Taxonomy of demand-driven industrial
nologically complex, manufacturing-driven economy policy interventions
—is cumbersome. It requires time, a sustained com- This chapter proposes a taxonomy that draws exten-
mitment of resources and careful balancing between sively from three interconnected strands of literature:
a supply push and a demand pull for manufactured demand-driven innovation policies, industrial policy
goods. The creation of productive and technological and sustainable consumption policies.1
capabilities to sustain productivity growth, employ- The structure acknowledges the distinction
ment and income generation is a necessary yet insuf- between demand for manufacturing products as a
ficient condition for long-run economic development. framework condition and as a variable that can be
There is also a need to ensure that adequate demand influenced by policy. It identifies the roles governments
136
“ Demand‑driven policies can be
mandatory or voluntary, operate at
the national and international level
and be applied by carrot or stick
play through demand-driven industrial policy inter-

ventions. It also brings to the fore the mechanisms
tools. By targeting final demand, governments seek to
influence consumers’ willingness to purchase a prod-
6
that influence the formation of consumer preferences uct that, in the end, is the result of a value system that
or enhance consumers’ capacity to take up a constant encompasses all necessary activities required by manu-

flow of innovative goods. facturing firms to transform raw materials into prod-
Demand-driven policies can be mandatory or vol- ucts for final users (Priem et al. 2012).
untary, they can operate at the national and interna- Table 6.1 summarizes the major roles governments
tional level and they can be applied by carrot or stick. can play through demand-driven industrial policy
Governments can pursue multiple objectives along- interventions. The top part of the table indicates where
side, or in conjunction with, supply-driven policy policy-makers may be able to design interventions that
Table 6.1
Government roles and industrial policy interventions for demand as a framework condition or an
actionable variable
Nature of demand/
role of government Description of intervention Examples of interventions
Framework condition
Facilitator of industrialization Remove market failures so that firms can • Fiscal, monetary, exchange rate and
and upgrading build on comparative advantages to take employment policies
advantage of external demand conditions • Provision of credits or loan guarantees
or opportunities for industrialization. • Incentives for foreign direct investment
(FDI)
• Export promotion and competition policies
Technological capability- Promote adoption, use and (eventually) • Selective industry protection
building partner development of technologies that enhance • Creation of public research centres
knowledge bases and presence in • Promotion of corporate research and
domestic and international markets. development
• Technology transfer mechanisms and joint
venture agreements
• Export promotion
• Import substitution
• Selective FDI
• Skills training
Market antenna Help domestic agents identify or anticipate • Foresight services and market intelligence
changes in technologies with implications
for the dynamics of manufacturing.
Actionable variable
Information provider and/or Influence consumer knowledge, • Communication, education and
awareness raiser awareness, readiness and capabilities to awareness-raising campaigns
consume certain manufacturing products. • National brands
• Voluntary labelling
Regulator Stimulate and regulate consumption of • Fiscal (taxes, tariffs, quotas, subsidies,
manufacturing products or influence tax credits or exemptions); monetary; and
consumer behaviour through changes in exchange rate policies
relative prices.
Influence consumption of manufacturing • Mandatory standards and labels
products or guide consumer behaviour
through laws, directives and regulations.
Enabler/co-generator of Promote, enhance or create demand for • Grants and subsidies for consumption of
innovation innovative products by targeting final users. innovation
Consumer Promote consumption of manufacturing • Public procurement
products, guide strategic investments
in innovation, address societal needs
through provision of manufactured
goods and ensure a market for strategic
industries or economic activities.
Source: UNIDO elaboration based on Santiago Rodríguez and Weiss (2017), Santiago Rodríguez et al. (2017) and Lin and Chang (2009).
137
“ Industrial policies built
on comparative advantages
propose that a key role of
government is to facilitate the
growth of the private sector
6 help domestic agents benefit from external market

dynamics. Policy considerations frequently revolve
endogenously determined by its endowment of natural
resources, labour and so on, as well as by policies that
around traditional supply-driven industrial policies, facilitate mobility of productive factors towards more
including trade- or exchange rate-related regimes; productive activities.
interventions condition the ability of domestic firms Chapter 4 of this report is consistent with these
to tap into foreign demand through, for example, “competitive advantage–following” strategies. To
diversification and upgrading (previous Industrial capture income from global demand for manufac-
Development Reports have delved extensively into tured goods, policy-makers need to support learning
some of these policy issues). The bottom part of the through exporting and the continuous upgrading of
table characterizes cases in which policy-makers have the manufacturing export portfolio, in order to avoid
more leeway to steer demand in desired directions. the risk of deteriorating terms of trade associated with
commodification processes. Policies to foster innova-
Demand as a framework condition for tion and technological change can improve export
industrialization prices and the terms of trade. The strategic choice of
The first two roles identified in Table 6.1 reflect export markets is also relevant, because it can facili-
opposed stances regarding the extent to which indus- tate economies of scale and upgrading processes. On
trial policies in developing countries should conform diversification, some evidence reflects the mainstream
to or defy comparative advantage.2 The third category literature, which argues that successful industrial
falls easily into either camp. Industrial policies to diversification builds gradually on existing strengths
respond to demand as a framework condition gener- and that complementary competences must be built.
ally target entrepreneurial behaviour or business and The experience of the mineral coltan (columbite-
investment environments conditioning the competi- tantalite) in the Democratic Republic of the Congo
tiveness and profitability of firms. Of importance are shows that the ability to build on natural resource
exchange rate and monetary policies; investment in endowments depends on the strength of the state and
general infrastructure (power supplies, roads, ports); its ability to stimulate the development of endogenous
and the governance of international trade and invest- industrial capacities. Despite policy interventions
ment. Government interventions can target specific adopted at the international level and a few at the
market segments or industries considered strategically national level, coltan remains a conflict mineral; small-
important for competitiveness and long-term eco- scale gold miners and warring armed groups control
nomic development. the mines (Bleischwitz et al. 2012). Lack of state con-
trol over the territory and poor enforcement of prop-
Government as a facilitator of the removal erty rights diminish the institutional capacities needed
of market failures to benefit from global demand for coltan (Bleischwitz
Advocates of industrial policies built on comparative et al. 2012, UNSC 2015, Usanov et al. 2013).
advantages propose that the role of the government is A more positive example of a strategy to remove
to facilitate the growth of the private sector, the ulti- market barriers, attract foreign investment and boost
mate driver of industrialization. Public policies should industrialization based on existing comparative advan-
level the playing field and create conditions to “initi- tage refers to Chile and its efforts at tapping into the
ate and support long-run sustained improvements in huge and growing global demand for lithium based
factors and productivity” (Lin and Chang 2009, p.2), products.3 Chilean authorities seek to develop domes-
helping domestic firms overcome market failures and tic lithium processing capacities by capitalizing on
enhancing their ability to exploit their country’s com- the country’s improved business environment condi-
parative advantage. A country’s industrial structure is tions, increased openness and attractiveness to foreign
138
“ The public sector can help
domestic firms comply with quality
and regulatory standards required
to compete in export markets
investors as a source of know-how and technology

transfer, and its massive reserves of lithium— Chile
during the previous six month-period. An additional
factor driving the attractiveness of this bidding pro-
6
is the second-largest producer in the world, behind cess is its pairing with major investment plans in infra-
only Australia (Jaskula 2017). Although Chile main- structure for alternative energy sources, notably solar

tains tight controls and quotas on lithium extraction power generation (CORFO and InvestChile 2017).
—only two companies possess extraction rights, the The public sector can help domestic firms com-
American firm Albemarle and Sociedad Química y ply with quality and regulatory standards related to
Minera de Chile S.A.—it is internationally recognized characteristics of products or underlying production
as offering a friendly environment for businesses in the processes in important export markets. Doing so
sector. should help them avoid persistent declines in manu-
On 30 March 2017, the Chilean Economic facturing export prices. Improving quality standards
Development Agency (CORFO) and the Foreign and upgrading production practices can also sup-
Investment Promotion Agency (InvestChile) port developing countries in adding value to natural
launched an international bid to attract investment resource endowments and transforming them into
in the domestic development of industries that use higher-quality exports.
lithium as a main input, including lithium batteries In Rwanda the national government, with assis-
and their components. The winning companies, to be tance from donor organizations, the private sector
announced by end-2017, will benefit from guaranteed and non-governmental organizations (NGOs), has
access to up to 25 percent of Albemarle’s lithium pro- made large investments in upgrading the coffee indus-
duction over about 27 years. They will be granted the try. Standards and certification have been selectively
lowest price of lithium available in the export market applied as a way to increase exports (Box 6.1).
Box 6.1
Upgrading the quality of coffee in Rwanda through standards and certification
In 2002 the government adopted a strategy intended to assessing a coffee’s quality before determining a price
reposition Rwanda as a speciality producer of high-qual- on a lot); and develops technical expertise (NAEB 2014,
ity, fully washed coffee beans—a segment of the industry Karuretwa 2016).
that offers more stable world prices and higher value than Rwanda has put in place 245 coffee washing stations,
lower-grade beans. Quality upgrading became a central six laboratories to certify the quality of coffee and one
pillar of the strategy to boost exports. roasting factory. According to the Fair Trade Africa data-
The collaborative strategy involved the National base, seven coffee cooperatives covering 23,000 small-
Agricultural Exports Board, the private sector, inter- scale producers have been fair-trade certified in Rwanda
national donors and NGOs. In addition to promoting (Jaffee et al. 2011, NAEB 2015).
coffee-washing stations, the strategy included capac- Certification by the National Agricultural Export Devel-
ity-building programmes, the establishment of farmer opment Board is a precondition for obtaining an export
cooperatives and adoption of standards and certifica- licence in Rwanda. The Rwandan Standards Board offers
tion (Jaffee et al. 2011, Karuretwa 2016). The multi-stake- certification ranging from the national Standardisation
holder collaboration gives coffee producers access to Mark and Excellence Mark to various certificates of the
public investments in infrastructure, skills training, International Organization for Standardization (ISO). Sev-
capacity-building programmes for coffee certification eral laboratories in the East African Community region
and verification for speciality coffee (targeting profes- offer certification for exports to the European Union and
sional certifiers), sustainable credit guarantee pro- other regions with more stringent standards. A range of
grammes (empowering smallholder farmers to facilitate voluntary and additional quality certifications, such as fair
exports via process upgrading); promotes the estab- trade and organic labels, have also been introduced in
lishment of cupping labs (consistent methodologies for Rwanda (Laterite 2016).
139
“ Governments can invest in
capabilities that allow countries to
diversify beyond their traditional
comparative advantage
6 Government as a technological capability–

building partner
objectives achieved. Equally relevant was the sequenc-
ing and coherence built into key policy interventions.
This second framework condition role sees govern- The highest priority for industrial policy was the
ments as more proactive. Governments can invest in development of industries with increasing knowledge
technological and productive capabilities that allow content. Heavy investment in human capital through
countries to engage in economic activities outside the literacy and excellence in training and research was
scope of their current endowments and traditional aligned with rising demand for skilled labour accord-
comparative advantages. This notion of technologi- ing to the changing needs of domestic industry. Trade
cal capability is at the heart of policies that target the policies selectively combined import restrictions
development of specific firms or sectors through delib- and export incentives, and managed exchange rates
erate and strategically managed protection against favoured export markets as the main source of demand
foreign competition. Strategies based on this notion for domestic products.
involve heavy investments but are highly uncertain. Modernization and technological upgrading of
Moreover, based on the experiences of some Latin domestic industries changed gradually, from creat-
American countries during the import substitution ing domestic scientific and technological capabilities
period of roughly the 1950s to the 1970s, policy inter- and learning from foreign best practices in the early
vention may turn out to be more damaging than help- stages of rapid industrialization to supporting business
ful, a problem identified as government failure.4 ventures and improving the leadership of the private
Successful examples of countries that have man- sector (OECD 2012). As this sector took over, gov-
aged to industrialize building on active and effective ernment intervention gradually phased out. From an
government-led, export-oriented, capability-building initial stance of promoting overall economic develop-
strategies can be found in Asia. These countries used ment, the government has shifted increasingly to sus-
external demand to boost structural change and tainable development. National Five-year economic
underpin development of technologically sophisticated development plans have given way to more focused,
manufacturing activities. The Republic of Korea is a issues-based development plans, which include green
paradigmatic case. Despite the generally disappointing growth (OECD 2012).
performance of Latin American countries regarding
competitive advantage–defying industrialization strat- Brazil
egies, the commercial aircraft industry in Brazil offers Although Brazil has long been home to aircraft design
an example of a successful experience in the region.5 and manufacturing, large-scale industrial activi-
ties are linked to the foundation of Embraer, one of
The Republic of Korea the world’s top three manufacturers of commercial
Starting in the 1960s, the Republic of Korea has aircraft.
achieved a radical structural change to become a A combination of factors helped usher in a new
global industrial and innovation leader (OECD phase in the Brazilian aircraft design and manu-
2012). Because of its ability to sustain a high growth facturing industry (Vértesy 2017). These factors
pattern, it is considered a recent graduate to the group involved public procurement (particularly through
of most industrialized, high-income economies. At the Brazilian Air Force) and a favourable regulatory
the core of the strategy was a series of national Five- framework for Embraer,6 higher global demand for
Year Economic Development Plans. Starting in 1962, a specific aircraft type (regional jets), strategic provi-
these plans set targets linked to specific lines of action sion of finance,7 the availability of technology on the
and resources allocation; the government carefully market, a corresponding innovation strategy and the
revised and upgraded targets in line with progress and necessary preconditions and domestic productive and
140
“ Technological vigilance
helps decision‑making and
planning by determining the
current state of the scientific and
technological environment
technological capacities to respond to these opportu-

nities.8 Although a market orientation was essential
Box 6.2
Anticipating technological changes in 6
manufacturing through technological foresight
for long-term growth, key policy interventions ena- Developing countries need to implement strategic
bled Embraer to respond to emerging demands in cer-

investments and introduce policies that allow them
tain market segments.9 to bridge the gap to the technological frontier. Doing
so requires developing the ability to dominate certain
market segments, minimize uncertainty and risk and
Government as an antenna with which to
cope with complexity. Policy-makers should foster the
foresee technological changes participation of multiple actors and sectors.
Governments can assist domestic firms in identifying Technology foresight—a systematic effort to scru-
emerging changes in demand for manufactured goods. tinize science, technology and innovation dynamics
and their potential impact on society—offers some
Pietrobelli and Puppato (2015) argue that policy-mak-
tools. It involves the participation of multiple agents,
ers in developing countries need to take seriously the including government, science and technology practi-
link between technology foresight and broader indus- tioners, industry, civil society and other stakeholders,
trial development strategies. Such links play major who systematically appraise the shape and orientation
roles in shaping the direction of technological change of future technological change in order to promote col-
lective action, leading to gains in sustainable socioec-
and economic growth (Box 6.2).
onomic development outcomes.
A closely related tool is technological vigilance, Features of technology foresight include the
which refers to efforts to determine the current state following:
of the scientific, technical and technological envi- • Systematic attempts to predict the future and
ronment to enable decision-making and planning. to rally collective action and build consensus on
and ownership of how to make the future happen.
Information is disseminated to increase the capacity
Foresight supports prioritization, the development
to anticipate technological, social and/or commercial of thematic portfolios and the identification of criti-
opportunities for industrialization, including threats. cal technologies to inform strategic investments.
A formal effort to develop capabilities for techno- • Participation of a broad set of agents in debates
logical vigilance is Antena Tecnológica (Technological on innovation and industrial policies, widening the
scope of policy interventions. Private sector par-
Antenna), launched in 2013 by Argentina’s Ministry of
ticipation is essential to facilitate coherence and
Science, Technology and Productive Innovation, with consistency between technological foresight and
the Argentinean Industrial Association (MINCYT the industrialization strategy.
n.d.). Antena Tecnológica is a free, web-based plat- • Flexibility at multiple levels (supranational, national,
form for technological vigilance and competitive regional and so on).
• The potential to align efforts in science, technol-
intelligence. Its intended audience includes the private
ogy, innovation and manufacturing to maximize
sector, universities and other research organizations. socioeconomic and environmental impacts.
Users can access information on technological trends,
Source: Pietrobelli and Puppato (2015).
regulatory changes, emerging business opportunities,
results from academic research and other topics locally
and globally through electronic bulletins, a library of policy interventions, allowing demand-driven instru-
documents and specialized studies on selected manu- ments to be deployed to foster industrialization.
facturing sectors (MINCYT n.d.). Economic outcomes such as employment, produc-
tivity growth and competitiveness in domestic and
Demand for manufactured goods as export markets remain core areas of public interven-
an actionable variable tion. Demand-driven instruments also broaden the
The bottom half of Table 6.1 captures situations in scope of government intervention to address concerns
which demand for manufacturing is responsive to about inclusiveness and environmental sustainability.
141
“ Governments can enhance
consumers’ knowledge about,
preferences for and readiness and
capabilities to purchase products
6 Government as information provider and

awareness raiser
Box 6.3
Eco-labelling in India
Governments can provide information on product The Indian government has introduced incentives
to green its domestic manufacturing industry and
qualities, usage and other characteristics. They can
increase its competitiveness. In parallel, it has pro-

also enhance consumers’ knowledge about, prefer- moted the adoption of voluntary labels to increase
ences for and readiness and capabilities to purchase consumer awareness of and preference for environ-
products. Initiatives can take the form of voluntary or mental goods.
mandatory labelling, communication and awareness In 2006 the Ministry of Power implemented a new,
voluntary standards and labelling scheme to help
campaigns, mainstream education, social media, mar-
consumers make informed choices about energy sav-
keting and public or community participation, as well ing and cost-saving products. The Bureau of Energy
as data collection, the development of indicators and Efficiency promotes and facilitates adoption of this
audits (see Chapter 5 on raising awareness). scheme and prescribes minimum energy performance
Enhanced labelling requirements often seek standards that are “validated” through labels affixed
to appliances. Its label has become obligatory for 5
increased transparency and consumer education. The
product groups and remains voluntary for another 16
most viable labels are those verified by third parties (Bureau of Energy Efficiency India 2016). The scheme
(OECD 2008). International efforts include the fair- has introduced robust models for monitoring and veri-
trade label, which promotes sustainable consumption fication, media campaigns and public procurement of
by helping consumers identify socially fair and envi- energy-efficient appliances.
ronmentally friendly products that meet strict stand- Source: Santiago Rodríguez and Weiss (2017).
ards (UNDESA 2010, UNEP 2012).

Eco-labels seek to stimulate more sustainable
consumption by improving the visibility of environ- and negative incentives (such as bans and taxes).
mentally friendly goods (Box 6.3). They can serve as Regulatory measures can improve product quality
benchmarking tools for differentiating firms from and manufacturing processes and negate some of the
competitors or as a way of rewarding innovation and adverse consequences of manufacturing products on
leadership in the marketplace (Shingrup 2013). They health, the environment and safety (OECD 2011a).
can be voluntary or compulsory. Governments can also introduce non-financial
Chapter 3 stresses the importance of domestic measures—laws, directives and regulations—t hat
demand, particularly household consumption and either reward or penalize the consumption of prod-
a thriving middle class, as drivers of manufacturing ucts. These measures target local or national authori-
development. Some developing countries are seek- ties; producers or retailers; and, to a lesser extent,
ing to foster demand for domestic industries through final consumers (BIO Intelligence Service 2012). An
local content and national branding campaigns tar- example is the adoption of standards to improve the
geting domestic consumers. These campaigns seek quality of manufactured products to meet export
to divert consumption of domestic manufacturing requirements or achieve inclusiveness, health, wel-
products by helping consumers differentiate between fare, environmental protection or security targets.
goods produced with national and imported inputs Governments can ban certain manufacturing prod-
(Table 6.2). ucts or harmful substances and require enforcement
and monitoring measures. Rwanda, for instance, has
Government as regulator banned the use of plastic bags (UNEP 2012).
Governments can use regulation to affect demand Shadlen and Massard da Fonseca (2013) assert
for manufactured goods. They can introduce posi- that regulatory measures can create synergies between
tive incentives (such as subsidies and tax exemptions) industrial and other social- or health-related policies.
142
“
Table 6.2
Features and benefits of national brand campaigns to foster local content and consumption of domestic manufacturing products
Benefits
Program Website Period Goals Strategic objectives For consumers For manufacturing industry
Primero www. Since 2009 • Foster national • Promote good-quality national Ensures quality • Increases local content
Ecuador primeroecuador. markets and industrial production in line with Ecuador´s and socially and • Improves access for
com/ development national policy and legislative environmentally licensees to funding, national
• Improve competitiveness framework responsible promotion via various
and consumption of • Foster national production and products distribution channels and
national products commerce long-term profitability
• Foster national consumption of
local goods that are socially and
environmental responsible
manufacturing products
• Maintain quality criteria and

standards
• Increase awareness about
domestic consumers seek to
the importance and value of

Local content and national
branding campaigns targeting
Ecuador´s production
divert consumption of domestic
Buy www.mtic.go.ug/ Approved • Increase consumption of • Take stock of local producers Not specified • Enhances profitability of local
Uganda images/policies/ by Cabinet local products through and improve their productive producers and suppliers of
—Build bubu.pdf in 2014, public procurement capacity domestic products
Uganda implemented • Encourage private • Enhance quality and • Increases competitiveness of
since June consumers to buy local competitiveness of local products local products
2016 products • Increase efficiency and • Spurs growth of small
• Increase share of local participation of local firms in and medium-size (SME)
firms in domestic trade public procurement enterprises
• Increase visibility of local • Creates employment
products in local outlets
• Increase awareness of the policy
Proudly www.proudlysa. Since 2001; Encourage South Africans • Promote sustainable job creation Not specified • Increases participation by
South co.za built on to make personal and • Ensure fair job standards to government, business,
African Australian organizational contributions protect rights of workers trades unions and organized
model to economic growth • Improve production and communities
consumption of quality domestic • Increases local production
manufactured goods and (at least 50 percent of cost
services of production must be
• Ensure environmentally incurred in South Africa, with
responsible management substantial processing of
practices imported materials)
• Engender pride and patriotism • Creates jobs (adoption of
• Promote “buy local” activism Local Procurement Accord
intended to create five million
jobs by 2020)
(continued)
143
6
6
144
Table 6.2 (continued)
Features and benefits of national brand campaigns to foster local content and consumption of domestic manufacturing products
Benefits
Program Website Period Goals Strategic objectives For consumers For manufacturing industry
Buy www.rdb. In • Boost domestic • Generate off-farm employment Offers good • Gives preferential treatment
Made in rw/home/ development production and stimulate by developing manufacturing value for price to Rwandan products in
Rwanda newsdetails/ since 2014 local consumption habits • Promote investment in energy, government procurement
article/made-in- • Reduce trade deficit machinery and information and • Fosters good image of
rwanda-expo- • Promote growth of communications technology Rwandan manufactured
an-appeal-for- Rwandan enterprises (ICT), in order to expand goods
local-products- domestic value chains and
consumption.html improve the business climate
• Give preference to local
manufacturers in public
procurement
• Increase awareness and image of
products made in Rwanda
• Educate consumers about
benefits of buying Rwandan
goods and services
Make in www.makeinindia. Since 2014 as • Encourage domestic • Strengthen manufacturing • Provides • Opens up various sectors
India com/home online platform companies and industry and raise awareness of various (including defence, railways,
“
multinationals to manufacturing in India incentives for and the space industry) for
manufacture their • Foster demand for manufacturing consumers, investment
products in India by facilitating investment particularly • Develops six industrial
• Transform India into • Foster innovation, enhance related to corridors
a global design and skill development, protect environmental • Establishes platform for
manufacturing hub intellectual property and improve goods discussing current trends
manufacturing infrastructure (renewable and technical issues with
energy, green experts
buildings, • Gives public procurement
etc.) preferences to producers
• Improves in national investment and
the quality of manufacturing zones
manufactured • Enhances requirements
goods of local value addition
in specific sectors (e.g.,
solar energy equipment,
The campaigns help
electronic hardware, fuel

consumers differentiate
efficient transport equipment,

IT-based security systems,
power, roads and highways,
railways, aviation and ports)
national and imported inputs
between goods produced with
Source: Santiago Rodríguez and Weiss (2017).

“ In Mexico ambitious regulatory
reform has focused on modifying the
domestic market for generic drugs
In Mexico ambitious regulatory reform has focused on

modifying the domestic market for generic drugs (Box
market and enhance access to good-quality, afford-
able medicines. It has also promoted improvements in
6
6.4). The reform helped the government strengthen manufacturing practices and attracted new players to
its capacity to govern the domestic pharmaceutical the market.

Box 6.4
Health policy as a driver of industrial policy in Mexico’s generic drug market
Marketing of pharmaceuticals in Mexico requires approval most prevalent diseases—namely cardiovascular disease,
by the Federal Commission for the Protection against San- oncology and diabetes among others—affecting the Mexi-
itary Risk (COFEPRIS) via the granting of a sanitary reg- can population (Radio Formula 2017). The share of gener-
istration. Before reform, sanitary registrations were valid ics in total pharmaceutical sales increased from 53 per-
indefinitely. As a result, sales of products that failed to cent to 84 percent; while in value terms the share went
comply with current sanitary and related legislation rose, from 30 percent to 52 percent, figure above those reported
firms could hold registrations for products they no longer by several other member countries of the Organisation for
sold and some “copy drugs” with suspected deficiencies Economic Co-operation and Development (OECD 2017b).
in quality and safety were able to thrive (Santiago Rod- On average, price reductions for final consumers are in the
ríguez 2010). By 2011 Mexico faced a backlog of about order of 55 percent (Radio Formula 2017).
8,000 registrations (COFEPRIS 2015). While the reform alone has not totally reverted increas-
To overcome some of these regulatory challenges, ing pressures on health expenditure, there are some
beginning in 1998 the Mexican health authorities intro- positive effects. The share of pharmaceutical spending
duced regulatory reforms to foster interchangeable gener- in total health expenditure in Mexico was 27.2 percent in
ics as a way to promote the manufacturing of cheaper but 2015—above the 18.9 percent observed in 1999, at the
high-quality and safe products. Core components of the beginning of the reform, but below the peak of 35.9 per-
strategy included the following: cent in 2003 (OECD 2017b). Relative to gross domestic
• Adoption of stricter quality requirements for drugs product (GDP), pharmaceutical spending dropped from
manufactured and marketed in the country, with 2.1 percent to 1.6 percent between 2003 and 2015; simi-
emphasis on generic drugs. larly, the share of out-of-pocket spending in total health
• Creation of independent laboratories mandated to expenditure fell from 51.0 percent in 1999 to 41.4 per-
perform the tests required to obtain an interchange- cent in 2015—with a peak of 55.7 percent in 2003 (OECD
able generic denomination. 2017b).
• Consideration of both public sector demand for Since a new Coordinating Commission for Negotiat-
drugs and private consumption, tapping into the then ing the Price of Medicines and other Health Inputs was
emerging but rapidly growing market for interchange- created in 2011, the government has made significant sav-
able generics (Santiago Rodríguez 2010). ings in public procurement while increasing the volume of
• Enhancing market competition by prescribing drugs purchases. For example, monthly budgetary allocations
based on active ingredients instead of brand names, have fallen over 48.5 percent from Mexican $894 million
and allowing consumers to buy interchangeable (~ $50.3 million) to Mexican $460 million (~ $25.9 million).
generics directly from the pharmacy at lower prices In contrast, monthly volumes purchased have increased
than innovator drugs. from 4.4 million units to 18.4 million units (Radio Formula
Official data on the structure and performance of the 2017).
domestic pharmaceutical market are sparse and often The number of independent laboratories—including
outdated, but the evidence suggests that despite some verification units, testing laboratories and units to test
initial difficulties to ensure uptake by the local industry, interchangeability and bioequivalence—rose from about
the mix of supply- and demand-driven policy instruments 30 in 2010 to more than 200 in 2016 (COFEPRIS 2016,
stemming from the regulatory reform has had strong Santiago Rodríguez 2010). These laboratories have helped
effects. Between 2011 and 2017, 15 packages of generic reduce the backlog of sanitary registrations and acceler-
drugs have been introduced to market, accounting for 37 ated decisions on product registration (COFEPRIS 2015).
active pharmaceutical ingredients contained in 491 new
generic drugs registrations and covering 71 percent of the
145
“ By promoting innovation,
governments can pursue economic
goals, address demands of vulnerable
segments of the population or
protect the environment
6 Government as generator or co-generator

of innovation
in remote and rural areas or in natural resource-driven
industries, public-private partnerships can enhance
Demand-driven innovation policies are receiving grow- agriculture innovation systems, technology transfer
ing attention. Mechanisms include grants, subsidies and capability building while leveraging public and
and other means to facilitate the uptake of innovations. private investments and sharing risks (Rankin et al.
By promoting innovation, governments pursue diverse 2016). The development of air-control fans for poul-
objectives, from meeting traditional economic goals to try feeding houses in Thailand illustrates how public-
addressing the demands of vulnerable segments of the private partnerships can assist in developing and com-
population and protecting the environment. mercializing small-scale technologies that help small
Governments can underpin demand for innova- and medium agroenterprises overcome loss of, or lim-
tion in three main ways: direct procurement of inno- ited market access due to pest or disease problems.
vations (the public sector buys goods not yet on the Between 2005 and 2009, the Thai National
market); adoption of incentives for innovation (with- Science and Technology Development Agency
out directly purchasing the product); and direct fund- (NSCTD), and the company B.International &
ing or other forms of direct support of research and Technology (BITC), a subsidiary of Betagro Group,
development (R&D). entered into a public-private partnership for innova-
Examples of direct procurement of innovations tion leading to development of new air-control fans to
include mission-oriented programmes that address increase production efficiency and reduce disease risk
some strategic government priorities and pressing in poultry production. The partnership was driven by
societal challenges that require radical innovations NSCTD with an investment of 2.16 million Thai baht
and multiplayer participation and coordination. The (~ $60.2 thousand), split between public (42 percent)
Manhattan Project (which developed the first atomic and private sources (58 percent).
bomb) and Project Apollo (which eventually put For BITC the public-private partnership served
the first man on the moon) are two historical exam- to stimulate domestic demand for a new technology
ples. More recent challenges calling for heavy global with applicability in multiple sectors. The company
investment in R&D include efforts to address climate also received tax deductions for its investment in the
change and the surge of pandemic diseases (Foray new technology. As a result, the company introduced
et al. 2012). Connecting scientific and technological PowerTECH, an air-control fan and systems for use
activities with concrete demands from the production in poultry feeding houses and other sectors, leading
and other sectors can be linked to the role of govern- to additional export revenue. Poultry producers also
ment as an antenna. benefited as the supplier provided loans for the acquisi-
An example of this kind of intervention is the tion of the fans; their estimated savings were equivalent
programme to subsidize the purchase of new-energy to 50 percent of imported fans, and energy savings of
vehicles in China, which seeks to promote the already about 20 percent in feeding houses (Rankin et al. 2016).
booming domestic car manufacturing industry while
reducing its impacts on the environment, notably air Government as consumer
pollution in urban areas (Box 6.5). This initiative is Public sector demand can promote consumption of
consistent with China’s national 13th Five-Year Plan manufactured goods, signalling strategic directions
2016–2020, which emphasizes innovation as a driver for investments in or made by certain industries. It
of development (The State Council, China 2016). can boost innovation, facilitate provision of manu-
Incentives to innovation can involve close col- facturing to satisfy societal needs and ensure markets
laboration through public-private partnerships. For for strategic industries and economic activities to spur
example, by providing technological solutions for use competitiveness and economic growth.
146
“ Through strategic public
procurement government demands
certain technologies, products
or services to stimulate market
emergence or deepening
Box 6.5
Fostering innovation in China by subsidizing the purchase of new-energy vehicles 6
China’s current national Five-Year Plan identifies strate- pressures led to partial withdrawal of restrictions on the
gic industries to be developed based on innovation, the purchase of foreign vehicles. In November 2011 the Chi-

greening of the industry, openness and inclusiveness. The nese government confirmed that subsidies would be avail-
new-energy vehicle industry is one of them (NDRC 2016). able on an equal basis to foreign-invested and domestic
The plan sets three main targets for this industry: confirms. The commitment did not appear to extend equal
serving energy, transforming and upgrading the Chinese treatment to imported vehicles. To qualify for these sub-
automotive industry and improving air quality by reducing sidies, foreign firms have agreed to produce new-energy
vehicle emissions (Zhang et al. 2013). vehicles through joint ventures in China, often under tech-
Strengthening the industry is expected to support Chi- nology transfer conditions (Spring 2015).
na’s efforts to reduce carbon dioxide emissions per unit of The subsidy seems to have contributed significantly to
GDP by 40–45 percent from the 2005 level by end-2020. the development of China’s new-energy vehicle industry.
China has introduced limits on corporate average fuel con- Production increased from 8,368 units in 2011 to 517,000
sumption of newly sold vehicles of 5l/100 kilometres by units in 2016, and sales rose from 8,159 units to 507,000
2020 and 4 litres/100 kilometres by 2025 (Zhang and Bai units (CAAM n.d., REVE 2012).1 In 2015 China became the
2017). It is estimated that new-energy vehicles introduced world’s largest market for electric cars, with a share of
in 2015 can reduce fuel consumption values from 7.02 litres the global market of almost 1 percent (the United States’
to 6.67 litres/100 kilometres (Zhang and Bai 2017). share is just 0.7 percent). In 2015 new registrations for
To boost demand for new-energy vehicles, China new-energy vehicles declined in the United States and tri-
introduced consumer subsidies in 2009 as part of the pilot pled in China (IEA 2016).
Thousands of Vehicles, Tens of Cities Programme. The The use of subsidies to consumers is not free of
subsidies offer a one-time reduction of up to 60 percent of shortcomings. In addition to the already mentioned risk
the vehicle’s final sale price. Support, from both the central of cheating behaviour, Li et al. (2016) assert that although
and local governments, is up to 50,000 yuan (~ $7,195) for consumers view the subsidy positively, satisfaction with it
each hybrid and 60,000 yuan (~ $8,634) for each pure elec- remains low, because it has failed to offset enough of the
tric vehicle (Li et al. 2016). The subsidies are handled by price differentials between new-energy and conventional
the car manufacturers; the amount depends on the vehicle vehicles and the purchasing cost of new-energy vehicles
category, technology type and efficiency performance—a remain high. Li et al. (2016) indicate that the structure of
complex structure for the instrument (Gong et al. 2013). the subsidy, split between central and local governments,
China renewed the subsidy programme in 2014. To and high transaction costs associated with the complex
prevent dependence of the industry on subsidies, and to tier structure of the subsidy make it difficult to disseminate
address cases of cheating by some manufacturers, the the benefits to potential buyers.
government decided in February 2017 to gradually phase
ote
N
out the subsidies by 2020 (The State Council, China 2017, 1. In China the term “new-energy vehicle” includes all partly or fully powered electric vehicles
Zhang and Bai 2017). as well as plug-in hybrid electric vehicles, battery electric vehicles and fuel-cells electric
vehicle. Sales and production figures from the China Association of Automobile Manufactur-
Eligibility for the subsidy was initially restricted to ers include only battery electric vehicles and plug-in hybrid electric vehicles (CAAM 2016).
locally produced models (Marro et al. 2015). International
A common tool to promote demand is public pro- Strategic public procurement occurs when gov-
curement, often but not necessarily linked to local ernment demands for certain technologies, products
content requirements.10 This section examines three or services stimulate the emergence or deepening of
subcategories of public procurement: strategic public markets for these products. Governments can assist
procurement to support strategic industries, includ- firms to recover sunk costs of large and risky invest-
ing by fostering innovation; green public procurement, ments or innovation projects, they can lead users to
which targets sustainable public consumption of manu- influence uptake and diffusion of innovations and
factured goods; and inclusive public procurement, which they can address financial problems or stimulate mis-
aims to assist certain disenfranchised social groups. sion-oriented innovation (Foray et al. 2012, Warwick
147
“ Strategic public procurement
is helping improve access
to essential medicines
6 2013). The e-Sri Lanka initiative uses strategic public

procurement to support the development of national
Box 6.6
Developing the capacities of small and
medium-size enterprises to provide
production capacities in ICT (Box 6.6). information and communication technology to
Sri Lanka’s public sector
South Africa’s strategy for fostering domestic
manufacturing includes identifying key or spillover Sri Lanka has a competitive ICT sector. Its compa-
industries, defined as industries with sufficient domes- nies export, employ qualified technical staff and have
tic demand and export potential. In 2017 it identified earned trust and recognition from domestic and inter-
rail rolling stock as one such industry (Department of national players.
In 2003 the government launched the e-Sri Lanka
Trade and Industry, South Africa 2017, Strachan 2016).
initiative, a $32 million programme, supported primarily
Along with supply-driven interventions such as export by the World Bank, that features public procurement
credits, special economic zones, technology transfer (UNCTAD 2013a). The initiative supports the develop-
and R&D incentives, the government uses strategic ment of production capacities, particularly for Sri Lan-
public procurement and local content requirements. Its kan SMEs to participate in public procurement of ICT
services. Strategic public procurement, including pro-
Competitive Supplier Development Programme requires
curement of software and hardware, is a key compo-
global original equipment manufacturers to observe nent of the initiative (eTenders Sri Lanka 2017).
local content requirements and respect supplier devel- The e-Sri Lanka initiative is committed to leverag-
opment commitments in bids. Its local content rules, ing opportunities within the framework of international
which vary by sector, require rail signalling and roll- competitive tenders to give preferential treatment to
domestic enterprises, which are awarded points (worth
ing stock to include at least 65 percent local contents
up to 15 percent of the total, in line with World Bank
and steel products and components for construction rules) during the evaluation of bids. This practice has
to be 100 percent local. To ensure compliance, the gov- encouraged joint ventures between local and interna-
ernment requires that local content requirements be tional enterprises, which have facilitated knowledge
transfer for local firms.
integral components of annual audits (Department of
Trade and Industry, South Africa 2017, Strachan 2016). Source: Santiago Rodríguez and Weiss (2017).
In 2014 South Africa procured about 50 billion

rand (~ $4.3 billion) of locomotives, the largest public
procurement in the sector in the country’s history. The Strategic public procurement is helping improve
process was conducted by the state-owned company access to essential medicines. Some countries in Latin
Transnet, which submitted to public tender the pro- America are purchasing essential medicines in collab-
curement of 1,064 locomotives, including electric and oration with the Strategic Fund of the Pan-American
diesel locomotives. The bid intended to enhance local Health Organization, negotiating better prices for
rolling stock manufacturing capacities and contribute the procurement of essential pharmaceutical products
to the country’s long-term growth objectives. under the aegis of the Central American Integration
Four global original equipment manufacturers— System through the Council of Health Ministers
CRRC Zhuzhou Electric Locomotive, Bombardier of Central America and the Dominican Republic
Transportation South Africa, General Electric South (COMISCA). Participating countries include Belize,
Africa and CNR Rolling Stock South Africa— Costa Rica, the Dominican Republic, El Salvador,
were awarded contracts. Of the 1,064 locomotives, Guatemala, Honduras, Nicaragua and Panama.
all but 66 will be built in South Africa, at Transnet As a regional cooperation framework, COMISCA
Engineering facilities. Transnet will take over about implements the Negociación Conjunta y Compra de
16 percent of the total build programme; about a third Medicamentos (NC-COMISCA—joint negotiation
of this 16 percent will be subcontracted to domestic and procurement of medicines), a pooled procurement
emerging engineering and manufacturing firms. mechanism, aligned to Sustainable Development
148
“ Dominica, the Dominican
Republic, Ecuador and Guatemala
provide preferential support to
women‑owned businesses
Goal 3 (ensuring healthy lives and promoting well-

being for all at all ages). NC-COMISCA provides
costs, lead to consumer education and awareness rais-
ing of sustainable consumption and increase the cred-
6
access to good-quality, safe and effective medicines at ibility of public authorities (UNIDO 2011b, World
a unified price for the region that is lower than what Bank 2012b). It was part of the national plans of Brazil,

each member country would obtain negotiating on Colombia, Ghana, South Africa, the United Republic
its own. of Tanzania and Zambia (UNEP 2012). According to
The mechanism builds on a model in which buyers European regulations, products that can be procured
negotiate prices collectively, select suppliers and agree through green contracts include energy-efficient com-
to procure from those suppliers; contracts are granted puters and cars, renewable electricity, office furniture
when at least three participating countries agree to from sustainable timber, low-energy buildings and
the price offered by the supplier. The operation is con- recycled paper (European Commission 2016).
cluded at the national level at the agreed price and
volumes. The Central American Integration System Inclusive public procurement
guarantees the agreements with pharmaceutical firms. Inclusive public procurement comprises public con-
Negotiations build on mechanisms that help define sumption of manufactured goods or innovation, the
products subject to pooled procurement. strategic allocation of quotas to ensure that minimum
NC-COMISCA has conducted nine negotia- demand for goods is provided by certain segments
tions. As of 2016, price reductions had resulted in sav- of firms (including firms owned by vulnerable social
ings of about $39 million for participating countries groups) and similar interventions.
(COMISCA 2016). Dominica, the Dominican Republic, Ecuador and
Guatemala provide preferential support to businesses
Green public procurement owned by women (Box 6.7). Public procurement acts
Green public procurement refers to government pur- in Kenya, Namibia, South Africa and Zambia also
chases that help achieve environmental and social goals, include women-led enterprises (Santiago Rodríguez
support sustainable companies in reducing production and Weiss 2017).
Box 6.7
Encouraging women-owned enterprises in the Dominican Republic to bid on public tenders
In 2008 the government of the Dominican Republic intro- of total public procurement (DGCP 2015). The average
duced a special public procurement policy aimed at monthly number of contracts issued by the public sec-
empowering women. The governmental also runs support tor to women-owned MSMEs rose from 287 in 2013 to
programmes to facilitate the participation of micro, small 551 in 2015. In 2013 the ratio of men to women in con-
and medium-size enterprises (MSMEs) in public tenders tract signing fell from 14:1 to 10:1. Women-led MSMEs are
(Compras Dominicana 2012). Under the policy, the gov- also showing increased interest in national tenders (Aristy
ernment committed to allocate 20 percent of public pro- Escuder 2016).
curement to MSMEs out of which 15 percent would be Several actions could increase the participation of
directed towards women-led MSMEs (Casier et al. 2015, women-led businesses in tendering (ITC 2014):
Ministry of Women, Dominican Republic 2010). The policy • Increase access to information about public procure-
required that women represent more than 50 percent of ment opportunities for women-owned businesses.
shareholders or social capital owners (Congreso Nacional, • Standardize and simplify tender processes.
Republica Dominicana 2008). • Rationalize requirements.
In 2014 alone this public procurement programme • Limit contract size.
helped increase participation of women in public procure- • Provide enough time for tenders.
ment by 15 percent (Casier et al. 2015). In 2015 women-
led businesses received 19 percent of the total value
149
“ Demand‑driven interventions
enjoyed spectacular success in
promoting automobile manufacturing
in the Republic of Korea
6 A long-term perspective on demand-

driven industrial policies: The Republic
types of models produced, the selective attraction of
foreign direct investment, tariff- and non-tariff barri-
of Korea’s automotive industry ers, subsidized loans, export subsidies and tax incen-
Demand-driven interventions enjoyed spectacular tives, together with the building of scientific organi-
success in promoting automobile manufacturing in zations to serve the industry and the promotion of
the Republic of Korea, which has ranked among the technological learning through licensing (Bartzokas
world’s top five producers for the past 15 years. Webb 2007, Cho et al. 2014, Truett and Truett 2014 and
(2007) identifies three phases in the development of Webb 2007). In line with the classic infant industry
the sector, each characterized by a different mix and approach, import restrictions ensured demand for
balance of demand- and supply-driven policy instru- domestic manufactures (OECD 2012).
ments (Figure 6.1).
The internalization phase
The imitation phase The imitation phase was superseded in the 1980s by
The 1960s marked the beginning of the imitation the internalization phase, which began just after the
phase, which lasted until the end of the 1970s. The oil shocks of 1979. The government promoted restruc-
government acted as a strong regulator, focusing on turing and consolidation to decrease the number of
building and consolidating a world-class, highly com- domestic manufacturers and gradually phased out pro-
petitive domestic car manufacturing base, reaching tectionist measures (Cho et al. 2014). Restructuring
economies of scale and acquiring foreign technologies. was possible thanks to the level of maturity reached
An aggressive export orientation provided the main by domestic automakers (Lee 2011). The decade was
impulse from the demand side. The main policy tools investment driven, with sharp expansion in manufac-
included local content requirements, limits on the turing and technological capabilities, in parallel with
Figure 6.1
Development of the Republic of Korea’s automotive industry: From imitation to innovation
Low income Lower-middle income Upper-middle income High income
Imitation phase Internalisation phase Innovation phase
Automotive Industry Long-term Korean Automotive Act and Implementation of various

5-Year Plan Heavy Chemical Industrialization Policy Foreign Vehicle demand-driven instruments to
Automobile Industry Promotion of heavy and Import Liberalization enhance eco-friendlier consumption
Protection Act chemical industries Measure
Act on the Special
Automotive Parts Localization Measure for Automotive
5-Year Plan Parts and Materials
19 arly
55
62
1965
66
5
s
1
70
E
19
19
19
19
19
19
19
19
19
20
20
20
The alliance of Hyundai, Oil shock and One million vehicle

Shinjn and Asia Motors economic recession exports reached
The Republic of marks the beginning
Korea produces of technological alliances End of knockdown
its first car, in the Republic of Korea assembly and first
“Sibal” independent production Takeover of Kia by
of Pony by Hyundai; start Hyundai; takeover of
Kia joins the “Big Three” of mass production with SsangYong by Daewoo
automakers in the domestic parts and
Republic of Korea technology
Note: Income classification is based on the World Bank’s income classification (Atlas methodology, gross national income per capita in $) of the calendar year 2010 (World Bank n.d. b). Historical data for
income per capita are from New Maddison Project Database (gross domestic product per capita in 1990 PPP$ [PPP is purchasing power parity]) (Bolt and van Zanden 2014).
Source: UNIDO elaboration based on Santiago Rodríguez et al. (2017) based on Cho et al. (2014); Webb (2007) and OECD (1999).
150
“ Fast‑paced innovation,
inclusiveness and environmental
sustainability are essential
for industrialization to drive
development and shared prosperity
market liberalization and the increasing promotion of

products, as import restrictions were removed.
role as co-generator of innovation and the greening of
the industry. In 2010 the government implemented a
6
Korean manufacturers started to base their com- Green Car Development Strategies and Projects policy
petitive advantage on two factors: meeting consumer and introduced demand-driven instruments to spur

preferences (by, for example, developing larger cars development of green technologies and domestic con-
and offering an increased variety of vehicles) and sumption of eco-friendly cars. Through strategic pub-
increasing their competitiveness (based on both price lic procurement it has sought to support and incentiv-
and quality). By the end of the 1980s, sales of cars in ize innovation by domestic small and medium-size
the domestic market started to gain momentum. enterprises. In parallel, the government is experiment-
The government maintained its active regulator role ing with consumer subsidies to promote dissemina-
in the 1980s. According to Cho et al. (2014) to stimu- tion of new-energy vehicles, signalling to domestic
late domestic demand for automobiles, the government car manufacturers its commitment to developing this
introduced automobile-related tax credits such as the market (OECD 2011a). The most recent new-energy
special consumption tax reduction. Diversification vehicle policy, Mid-term Strategies and Road Map for
and expansion of the consumer base was possible via Eco-Friendly Motor Vehicle Distribution (2014–2020),
the establishment of the automobile distribution sys- aims to distribute 2.2 million new-energy vehicles by
tem and strengthened consumer protection policies. 2020 (Ministry of Environment, Korea n.d., OECD
Efforts at expanding demand were in line with Korean 2011a).
automotive manufacturers’ strategies to build up mass
production systems, modernize production methods, A mix of supply- and demand-driven
expand the outsourcing of autoparts and advance The Korean government used a mix of supply- and
towards integrated production system with mixed demand-driven instruments (Table 6.3).
model production. Relaxation of regulations designat-
ing automotive as a strategic industry allowed incum- Concluding remarks
bent firms to expand their offer of vehicle types and It only takes a minute to look around and recognize
models, while new firms entered the market. how much manufacturing activities have transformed
the world we live in. Looking ahead, fast-paced inno-
The innovation phase vation and concerns around inclusiveness and envi-
The 1990s saw a transition towards the innovation- ronmental sustainability should continue to influence
driven phase. The focus of policy intervention and industrialization as a driver of development and shared
the overall dynamics of the industry began to cen- prosperity. These trends share in common questions
tre on the deepening of innovation capabilities in a around their impacts on employment and income, the
rapidly growing domestic market (Bartzokas 2007, dynamics of international trade and the efficient use of
Cho et al. 2014). The industry had reached maturity scarce resources. The virtuous circle of manufacturing
and competitiveness, having developed substantial consumption proposed in this Report offers a suitable
indigenous technological capabilities. Strong exports framework to search answers to those questions, fram-
accompanied dramatic increases in the registration of ing them within the interactions that characterize
new passenger cars, including from foreign suppliers. manufacturing production and consumption.
This strong performance in both domestic and foreign The emphasis on demand broadens the scope of
demand suggests that saturation of demand is still not policy-making around economic and inclusive and
an issue for the country’s car manufacturers. sustainable development outcomes, creating space for
The government maintains its role as market reg- synergy between industrial and other development
ulator. It has, however, started to play a more active policies. It likewise underscores policy-making as a
151
“ Policy efforts should
consider the role of government
in helping domestic agents to
spot and capitalize on scientific
and technological progress
6 Table 6.3
Policy instruments the Republic of Korea used to develop its automobile industry
Phase of development
Imitation Internalization Innovation
Policy instrument (1960s–1970s) (1980s) (1990s–2010s)

Supply-driven
Export subsidies ✔
Restrictions on foreign direct investment ✔
Subsidized loans ✔
Technology licensing ✔
Scientific institution building ✔ ✔
Joint ventures ✔
Technology development fund ✔
Promotion of industrial research and development
Producer tax incentives ✔ ✔
Demand-driven
Consumer tax incentives ✔ ✔
Consumer subsidies ✔
Supply- and demand-driven
Local content requirements ✔ ✔ ✔
Tariff- and non-tariff barriers ✔ ✔ ✔
Restriction of imports ✔
Competitiveness policies ✔ ✔
process involving multiple stakeholders. Demand- technological and productive capabilities. Previous
driven policy interventions thus shape the institu- Industrial Development Reports, and Chapters 3 and
tional framework that allows countries to respond to 4 in this one, offer guidance on the kind of macro-
current or emerging opportunities for industrializa- fiscal and monetary policy instruments to hand, with
tion. Governments assume different roles, implement- industrial policy options available.
ing distinct combinations of supply- and demand- Policy efforts should also consider the role of
oriented interventions. Policy-makers will continue to government in helping domestic agents to spot and
face the challenge of balancing between policies that capitalize on scientific and technological progress, the
target supply, or demand, or both. conditions resulting from changes in the international
Countries differ hugely in productive and policy- environment around intellectual property rights, the
making capacities, in the strength of the domestic surge of international demand for certain commodity
market and in the conditions for their integration products, or even regulatory reforms that dramatically
to global markets; therefore, readiness to tap into change the rules of the game forcing innovation and
demand for manufacturing products as a driver of adaptation to more competitive environments domes-
industrialization is highly contextual. For most coun- tically or abroad (Lee and Malerba 2017, Perez and
tries in the early stages of industrialization, where Soete 1988).
demand for manufacturing is generally a framework This chapter illustrated the kind of demand-driven
condition, the evidence suggests that policy responses instruments that policy-makers can deploy to manage
are mostly supply driven, geared to foster domestic demand. Regarding economic targets, public demand
152
“ Good governance, clear
objectives and a deep
understanding of country contexts
are needed for demand‑driven
policy instruments to work
can be mobilized, often in combination with setting

local content requirements (strategic public procure-
of interventions with direct implications on openness
to trade or interventions that can be taken as provid-
6
ment in South Africa’s railway industry or Sri Lanka’s ing undue protection to domestic industries remains
ICT industry), exerting government regulatory pow- contentious. However, under certain conditions it

ers through adoption of standards and certifications seems feasible to make use of them. Aggarwal and
(Rwanda’s coffee quality upgrading and export pro- Evenett (2014) suggest that there is space for policy-
motion) or by brokering knowledge and information makers to explore concrete interventions within, and
to influence consumer awareness and choices to foster even against, WTO rules, such as policies on food
demand for domestic producers (national branding safety, that allow them to address pressing social
campaigns in Ecuador, Uganda and others). objectives. Deviations from the WTO’s principles of
On inclusiveness, one can highlight interventions non-discriminatory treatment are possible if they are
that seek enhanced inclusiveness in consumption transparent, grounded in scientific evidence and other
(health reform in Mexico or pooled procurement of objective criteria, and adequately time-bound. The
medicines in other Latin American countries). There joint procurement of essential medicines in Central
is also inclusiveness in manufacturing as an economic America shows that there is room to pursue interna-
activity (quotas in strategic public procurement for tional policy coordination within current rules on
women-led enterprises in the Dominican Republic or international trade and investment, and to capitalize
preferential access and capacity building for small and on regional or multilateral collaboration mechanisms.
medium-size enterprises in ICT in Sri Lanka). The Public procurement is relevant here, given its
cases of Mexico and the NC-COMISCA show the widespread use in developed and developing coun-
connections between health and industrial policies. tries. Kattel and Lember (2010) recognize that public
Regarding environmental sustainability, incen- procurement of innovative products is one of the most
tives to consumers can redirect development of certain promising and powerful innovations and industrial
industries (subsidies for the purchase of new-energy policy tools at the disposal of policy-makers. But they
vehicle cars in China); while in some other cases the also acknowledge that public procurement is prone
goal can be to enhance consumers’ perception of envi- to delivering below expectations, and highlight the
ronment friendly goods (Eco-labels in India) or more strong policy capacity required to use public procure-
directly create demand for them (public procurement ment for development, but that is missing in most
of sustainable lighting solutions also in India). developing countries. The authors urge those countries
From a long-term perspective, both the Republic to enhance the policy capacities needed to take advan-
of Korea’s car manufacturing history and Brazil’s tage of the complex and multi-layered industrial policy
experience in aircraft showed governments pursuing space still available under WTO rules.
strategies to consolidate an industry and create econo- Good governance, the ability to set clear objec-
mies of scale before embarking in more risky product tives and a deep understanding of country contexts
and market diversification strategies, which tie in well are needed for demand-driven policies instruments
to the discussion in Chapters 2 and 4. to work. Governments need to be aware of possible
Policy-makers need to understand their capacities trade-offs between policy tools and intended targets,
and policy space in which to choose the policy mix and should enhance their monitoring and evaluation
for boosting industrialization. Debate about the use to better codify their experiences.
153
6 Notes
1. See Santiago Rodríguez and Weiss (2017) and 7. Customers of Embraer could also access loans
Santiago Rodríguez et al. (2017) for a discussion from BNDES (the Brazilian state development
of these issues. bank) and export finance funds from the state-
2. See Lin and Chang (2009) for a vivid example of owned commercial bank Banco do Brasil.
some basic tenets of this debate in the literature. 8. One of the main reasons for setting up Embraer,
3. Lithium has wide applications in global value in 1969, was to commercialize a new aircraft
chains. Lithium batteries for example, have wide- design of the Aerospace Technology Centre, an
spread use in transport, energy storage and con- advanced public research institute.
sumer electronics and devices; they enjoy a booming 9. Interventions included establishing technologi-
global demand—by 2022 the global market should cal capabilities and phasing out reliance on public
double from the current $20 billion–$22 billion support; combining the pulling capacity of a state-
(CORFO and InvestChile 2017). owned enterprise with an entrepreneurial culture;
4. Governments may be captured by vested interests; using linkages with the Brazilian Air Force or
be unable to enforce contracts or protect property the government to finance development, access
rights; or encounter challenges associated with technology and facilitate export market access;
asymmetric information, rent-seeking behav- supporting strategic scientific and technological
iour and the potential to use industrial policy to capacities through established public research and
pursue protectionist or otherwise anticompeti- training centres; and adopting a diversified policy
tive goals (Lin and Chang 2009, Rodrik 2008, mix that provided a variety of tools, such as R&D
Warwick 2013). support, financing for the development of new
5. The global aircraft industry is peculiar, because aircraft, military procurement, credit through
of its very high capital and technology intensities the state development bank, facilitated access to
and the long lead times between the design of an technology, outright market protection (during
aircraft prototype, its entry into service and the the emerging phase), exemptions from taxes and
eventual financial break-even point. Public inter- duties, and diplomatic support (for certification
ventions are widespread in all market segments in and military exports). See Santiago Rodríguez
industrial countries and in late industrializers. et al. (2017).
6. Exemption from duties on imports of inputs and 10. In 2016 the market for public procurement
from trade and production taxes reduced the in developing countries was valued at about
price of Embraer’s aircraft, which relied heavily $820 billion a year, about half of these countries’
on imported parts and components. A 50 per- government budgets (World Bank Group 2016).
cent duty on similar imported aircraft discour- The share in developed economies was about
aged domestic buyers from choosing competitors one-third of government spending (European
(Goldstein 2002). Commission 2017c, World Bank Group 2016).
154
Part B
Trends in
industrial
development
indicators
155
Chapter 7
Industrial trends: Manufacturing

value added, employment, prices,
exports and energy intensity
Part A of this report identifies several key trends. One to grow in developing and emerging industrial econo-
is that manufacturing is the major provider of new mies, although the pace of annual growth slowed to
goods, which become affordable as a result of rapid 3.8 percent. Manufacturing rebounded in industrial-
productivity gains and a steady decline in their relative ized economies in 2010, but subsequent growth was
prices. Another is that manufacturing exports are key lower than before the crisis.
to promoting broad-based economic growth. Part A Globally, the average annual rate of growth of
also stresses the importance of moving consumption global MVA rose slightly between 1990–2000 and
patterns towards environmental goods, rendering the 2000–2016, from 2.9 percent to 3.1 percent. It
virtuous circle of consumption environmentally sus- slowed in industrialized economies, from 2.3 percent
tainable. One way of doing so is to increase energy effi- to 1.3 percent, and rose in developing and emerg-
ciency in manufacturing, something that is happening ing industrial economies, from 5.0 to 6.5 percent
across country groups. (Table 7.2).
China accounted for more than half the MVA
Trends in value added produced by developing and emerging industrial
Manufacturing is the key provider of new and better economies. Average annual growth of MVA by China
goods, as reflected in the evolution of manufacturing decelerated from 12.8 percent in 1990–2000 to
value added (MVA) at constant prices. It is a major 10.3 percent in 2000–2016 (Table 7.3). Other devel-
driver of economic growth and the creation of new oping and emerging industrial economies showed
goods, globally and particularly in developing and sharp gains in their MVA growth rates. An exception
emerging industrial economies.
Global MVA has increased since 1990, with a Figure 7.1
An increasing trend in global manufacturing
short, sharp decline in 2009 caused by the global value added
financial crisis, particularly in industrialized econo-
500
Manufacturing value added (index, 1990 = 100)
mies (Figure 7.1). Growth of global MVA has been

lifted by high growth rates in developing and emerg- Developing and emerging industrial economies
ing industrial economies. 400
Global MVA more than doubled between 1990

and 2016 to $12,316 billion (at constant 2010 prices).1
300
Developing and emerging industrial economies’ share
doubled over this period, rising from 21.7 percent to World
44.6 percent, reaching $5,494 billion at 2010 constant 200
prices (Table 7.1).

China has the world’s largest share of MVA. It Industrialized economies
100
doubled, from 12.6 percent in 2006 to 24.4 percent in
2016. The United States, whose share declined from
20 percent to 16 percent over the period, has the sec- 0
1990 1995 2000 2005 2010 2016
ond-largest share (Figure 7.2). (est.)
Manufacturing declined sharply during the Note: All values are in constant 2010 $. Industrialization level classification is based on Annex
C1, Table C1.2.
global financial crisis (Figure 7.3). In 2009 MVA fell Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO 2017f).
11.6 percent in industrialized economies. It continued
157
“ China has the world’s largest
share of MVA and accounted
for more than half the MVA
produced by developing and
7 Table 7.1
Manufacturing value added in developing and emerging industrial economies by industrialization
level, development group, region and income, 1990, 2000 and 2016
Manufacturing value added

Industrial trends
(billions, constant 2010 $) Manufacturing value added (percent)

Grouping 1990 2000 2016 (est.) 1990 2000 2016 (est.)
World 5,643.0 7,535.0 12,316.0 100.0 100.0 100.0
By industrialization level
Industrialized economies 4,417.0 5,539.0 6,822.0 78.3 73.5 55.4
Developing and emerging
industrial economies 1,226.0 1,997.0 5,494.0 21.7 26.5 44.6
Emerging industrial economies 1,017.0 1,738.0 4,926.0 83.0 87.0 89.7
Other developing economies 179.0 228.0 478.0 14.6 11.4 1.6
Least developed countries 30.0 30.0 91.0 2.4 1.5 8.7
By region (developing and emerging industrial economies)
Africa 113.0 129.0 240.0 9.2 6.5 4.4
Asia and Pacific 474.0 1,085.0 4,177.0 38.6 54.3 76.0
Europe 196.0 197.0 365.0 16.0 9.9 6.6
Latin America 444.0 586.0 712.0 36.2 29.3 13.0
By income
High income 4,482.0 5,607.0 6,971.0 79.4 74.4 56.6
Upper-middle income 853.0 1,511.0 4,282.0 15.1 20.1 34.8
Lower-middle income 270.0 383.0 980.0 4.8 5.1 8.0
Low income 39.0 34.0 84.0 0.9 0.6 1.2
Note: Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3.
Figure 7.2
The 15 largest manufacturing producers in the world
3,000 30
Manufacturing value added (constant 2010 $, billions)
world manufacturing value added (percent)

Share of country manufacturing value added in
2,500 25
2,000
20
1,500 15
1,000 10
500 5
0 0
China United Japan Germany India Republic Italy France Brazil United Indonesia Mexico Russian Canada Spain
States of Korea Kingdom Federation
Note: All values are estimates for 2016.

158
“ World MVA has grown slightly
faster than GDP, strongly influenced
by high MVA growth in developing
and emerging industrial economies
Figure 7.3
Annual growth of manufacturing value added
Table 7.2
Average annual growth rate of manufacturing 7
reflects a recovery of manufacturing after the value added by industrialization level,
global financial crisis development group, region and income,
1990–2016 (percent)
Industrial trends
15
Annual growth of manufacturing value added (percent)
2000–2016
Grouping 1990–2000 (est.)
10 World 2.9 3.1
Developing and emerging industrial economies
5 Industrialized economies 2.3 1.3
Industrialized economies Developing and emerging
industrial economies 5.0 6.5
0
Emerging industrial
economies 5.5 6.7
Other developing
–5
economies 2.4 4.7
Least developed
countries 0.2 7.1
–10
By region
(developing and emerging industrial economies)
–15 Africa 1.4 4.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(est.) Asia and Pacific 4.6 5.9
Note: All values are in constant 2010 $. Industrialization level classification is based on Annex Europe 1.0 1.3
C1, Table C1.2.
Latin America 2.9 1.2
By income
High income 2.3 1.4
Upper-middle income 5.9 6.7
is Brazil, whose share among such economies fell Lower-middle income 3.6 6.1
from 14.9 percent in 1990 to 4.1 percent in 2016 Low income –1.4 5.8
(Figure 7.4).
Note: Manufacturing value added is in constant 2010 $. Regional, industrialization and income
World MVA has grown slightly faster than gross level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3.
Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database
domestic product (GDP), strongly influenced by high (UNIDO 2017f).
MVA growth in developing and emerging industrial

economies (Figure 7.5).
In industrialized economies the MVA share of Table 7.3
Average annual growth rate of manufacturing
GDP declined from 14.7 percent in 1991 to 13.9 per- value added in selected countries, 1990–2016
cent in 2014 (Figure 7.6), thanks to the increasing (percent)
importance of services. In developing and emerging Country 1990–2000 2000–2016 (est.)

industrial economies, the share climbed from 15.4 per- Belarus 0.01 6.6
cent to 20.3 percent, thanks largely to the relocation of Brazil 1.8 0.3
manufacturing production from industrialized econo- Bulgaria –4.5 4.2
mies to the developing world. China 12.8 10.3
India 5.9 7.9
Regional trends Peru 3.6 4.5
Europe was once the world’s largest manufactur- Romania –2.8 3.7
ing region, accounting for 40.3 percent of MVA in Note: Manufacturing value added is in constant 2010 $.
Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database
1990 and 33.4 percent in 2000. The Asia and Pacific (UNIDO 2017f).
region had overtaken it, increasing its share of MVA

159
“ Africa’s share of world MVA was
2 percent in 2016, and its share of
MVA in GDP fell from 12.8 percent
in 1990 to 10.5 percent in 2016
7 Figure 7.4
China is the largest manufacturing producer in developing and emerging industrial economies
(percent of country group’s manufacturing value added)
1990 2000
Industrial trends
China
15.3 Other
India developing China
Other 5.8 and emerging 31.4
developing industrial
and emerging economies
industrial Brazil 37.6
economies 14.9
50.7
India
6.3
Mexico Brazil
8.8 Mexico 10.9
Indonesia 5.4 8.4
Indonesia 4.5
d. 2016
c. 2010 (est.)
Other
Other developing
developing and emerging
and emerging industrial
industrial economies
economies 50.7
29.5 China China
47.9 54.6
Indonesia 4.1
Indonesia 4.1 Mexico 3.7
Mexico 4.3 Brazil Brazil 4.1 India

7.0 India 7.7
7.0
Note: All values are in constant 2010 $. Industrialization level classification is based on Annex C1, Table C1.2.
to 44.1 percent in 2010. Its share of MVA in 2016 is in 2000–2016, and its global MVA share decreased
estimated at 49.5 percent (Figure 7.7). from 8.3 percent in 2000 to 6.2 percent in 2016. High
Annual average MVA growth rate in the Asia and growth rates in Argentina, Chile and Peru are the
Pacific region climbed to almost 6 percent in 2000– main drivers of the region’s MVA growth.
2016 (see Table 7.2), driven largely by China.
Although Africa’s annual MVA growth rose from Manufacturing value added per capita
1.4 percent in 1990–2000 to 4.0 percent in 2000– Contrary to popular perception, the absolute value
2016, its MVA remains very low (Figure 7.8). Africa’s of manufacturing production and MVA per capita
share of world MVA was 2.0 percent in 2016, and its increased in all country groups (including industrial-
share of MVA in GDP fell from 12.8 percent in 1990 ized economies) between 1990 and 2016 (Figure 7.9).
to 10.5 percent in 2016. And despite faster average annual growth of MVA per
Annual average MVA growth in Latin America capita in developing and emerging industrial econo-
slowed from 2.9 percent in 1990–2000 to 1.2 percent mies, MVA per capita in industrialized economies
160
“ Contrary to popular perception,
the absolute value of manufacturing
production and MVA per capita
increased in all country groups
between 1990 and 2016
Figure 7.5
A shift of manufacturing production from industrialized economies to developing and emerging 7
industrial economies
a. Industralized economies b. Developing and emerging industrial economies
Industrial trends
200 500
Index, 1990 = 100
Index, 1990 = 100

GDP
400
150
GDP
300
100
200
50
100
0 0
1990 1995 2000 2005 2010 2016 1990 1995 2000 2005 2010 2016
(est.) (est.)
Note: All values are in constant 2010 $. GDP is gross domestic product. Industrialization level classification is based on Annex C1, Table C1.2.
Figure 7.6
The importance of manufacturing industries is increasing in developing and emerging industrial
economies compared with a declining trend in industrialized economies
a. Industralized economies b. Developing and emerging industrial economies

22 22
Manufacturing share of GDP (percent)
Manufacturing share of GDP (percent)
20 20
18 18
16 16
14 14
12 12
10 10
1990 1995 2000 2005 2010 2016 1990 1995 2000 2005 2010 2016
(est.) (est.)
Note: GDP is gross domestic product and is in constant 2010 $. Industrialization level classification is based on Annex C1, Table C1.2.
161
“ The sharpest increase
in global MVA share was in
computer, electronic and optical
products, from 6.8 percent in
2005 to 8.5 percent in 2015
7 Figure 7.7
The Asia and Pacific region covered almost half of global manufacturing production in 2016 (percent
of global manufacturing value added)
1990 2000
Industrial trends
Africa 2.0 Africa 1.7
Latin Latin
America America
8.4 8.3
Asia and
North Pacific North Asia and
America 27.6 America Pacific
21.7 24.1 32.5
Europe
40.3 Europe
33.4
d. 2016
c. 2010 (est.)
Africa 1.8 Latin America 6.2 Africa 2.0

Latin
America
7.5
North
North America
America 17.4
19.2
Asia and Asia and
Pacific Pacific
44.1 49.5
Europe
Europe 25.1
27.4
Note: All values are in constant 2010 $. Regional classification is based on Annex C1, Table C1.1.
remains many times higher. Average annual MVA in classified (8.2 percent); and motor vehicles, trailers
industrialized economies rose 7.2 percent between and semi-trailers (8.1 percent) (Table 7.4).
2010 and 2016, and MVA per capita increased The sharpest increase in global MVA share was in
4.3 percent. computer, electronic and optical products, the share of
which grew from 6.8 percent in 2005 to 8.5 percent in
Sectoral composition of manufacturing 2015. Three low-tech industries lost shares: wood and
value added products of wood and cork, printing and reproduction
The leading global manufacturing industries in 2015 of recorded media and furniture.
were food products and beverages (13.9 percent of Industrialized economies still dominate world
total); chemicals and chemical products (12.6 per- MVA, largely through the manufacturing of medium-
cent); computer, electronic and optical products high and high-tech products. Developing and emerg-
(8.5 percent); machinery and equipment not elsewhere ing industrial economies produce largely basic
162
“ The Asia and Pacific region has
dominated global manufacturing
production since 2002
Figure 7.8
The Asia and Pacific region has dominated global manufacturing production since 2002 7
7,000
Manufacturing value added (constant 2010 $, millions)
Industrial trends
6,000
Asia and Pacific
5,000
4,000
Europe
3,000
North America
2,000
Latin America
1,000
Africa
0
1990 1995 2000 2005 2010 2016
(est.)
Note: All values are in constant 2010 $. Regional classification is based on Annex C1, Table C1.1.
Figure 7.9
Manufacturing value added per capita in industrialized economies is multi-fold higher than in
developing and emerging economies
6,000
Manufacturing value added per capita (constant 2010 $)
Developing and emerging industrial economies Industralized economies World
5,000
4,000
3,000
2,000
1,000
0
1990 1995 2000 2005 2010 2016
(est.)
163
“ By 2015 industrialized economies
had lost their dominance in various
manufacturing subsectors
7 Table 7.4
Share of manufacturing value added by industry group, industrialization level and worldwide, 2000,
2005 and 2015 (percent)
Developing and
Industrial trends
Industrialized emerging industrial

economies economies World
Subsector 2005 2010 2015 2005 2010 2015 2005 2010 2015
Manufacture of food products and beverages 12.3 13.0 12.8 16.7 15.8 15.6 13.5 14.0 13.9
Manufacture of tobacco products 0.9 0.8 0.6 2.3 2.2 2.1 1.3 1.3 1.3
Manufacture of textiles 1.7 1.2 1.1 4.6 4.3 4.1 2.5 2.3 2.4
Manufacture of wearing apparel; dressing and dyeing of fur 1.2 0.9 0.7 3.4 3.1 3.0 1.8 1.7 1.6
Tanning and dressing of leather; manufacture of luggage,
handbags, saddlery, harness and footwear 0.5 0.4 0.4 1.3 1.2 1.1 0.7 0.7 0.7
Manufacture of wood and of products of wood and cork,
except furniture; manufacture of articles of straw and
plaiting materials 2.1 1.7 1.6 1.6 1.3 1.3 2.0 1.5 1.5
Manufacture of paper and paper products 3.1 2.9 2.8 2.8 2.7 2.6 3.0 2.9 2.7
Publishing, printing and reproduction of recorded media 2.5 2.3 2.0 1.2 1.1 1.0 2.1 1.9 1.6
Manufacture of coke, refined petroleum products and
nuclear fuel 3.2 3.4 3.4 7.2 5.9 4.9 4.3 4.3 4.0
Manufacture of chemicals and chemical products 12.6 13.3 13.0 11.1 11.4 12.1 12.2 12.6 12.6
Manufacture of rubber and plastics products 4.9 4.7 4.7 4.0 3.8 3.6 4.7 4.4 4.3
Manufacture of other non-metallic mineral products 4.0 3.4 3.3 5.2 5.5 5.5 4.3 4.1 4.2
Manufacture of basic metals 4.9 4.9 4.6 9.8 10.1 10.7 6.3 6.7 7.1
Manufacture of fabricated metal products, except
machinery and equipment 8.5 7.9 8.0 4.6 4.6 4.8 7.5 6.7 6.7
Manufacture of machinery and equipment n.e.c. 9.7 9.4 9.8 4.7 5.8 5.8 8.3 8.1 8.2
Manufacture of computer, electronic and optical products 7.5 9.5 9.8 5.1 5.9 6.7 6.8 8.2 8.5
Manufacture of electrical machinery and apparatus n.e.c. 4.3 4.3 4.0 3.4 4.0 4.1 4.1 4.2 4.1
Manufacture of motor vehicles, trailers and semi-trailers 8.5 8.0 9.1 6.4 6.9 6.8 7.9 7.6 8.1
Manufacture of other transport equipment 3.3 3.9 4.1 2.1 2.1 1.9 2.9 3.3 3.2
Manufacture of furniture; manufacturing n.e.c. 4.3 4.1 4.1 2.5 2.3 2.3 3.8 3.5 3.3
Total manufacturing 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Note: Manufacturing value added is in constant 2010 $. ISIC is International Standard Classification and n.e.c. is not elsewhere classified. Manufacture of computer, electronic and optical products
includes ISIC Rev. 3 codes 30, 32 and 33. Industrialization level and industry group classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.1.
Source: UNIDO elaboration based on the INDSTAT2 ISIC, Rev. 3. database (UNIDO 2017d).
consumer goods, although their shares of medium- developing and emerging industrial economies, and
high and high-tech products increased sharply most growth took place in medium-high and high-
between 2005 and 2015. tech sectors. Developing and emerging industrial
In 2005 industrialized economies were the leader economies became the main producers of low- and
in all manufacturing industries except textiles, wear- medium-tech products, such as most basic consumer
ing apparel, and leather (Table 7.5). By 2015, industri- goods and basic metals.
alized economies had lost their dominance in various Among developing and emerging industrial
manufacturing subsectors, including tobacco, coke economies, China dominated manufacturing
and refined petroleum products, non-metallic mineral in all sectors in 2015, followed by India, Brazil,
products and basic metals. During this period, MVA Indonesia and Mexico. It led in most manufacturing
grew more slowly in industrialized economies than in subsectors.
164
“ Medium‑high and high‑tech
products continue to dominate
manufacturing production in
industrialized economies
Table 7.5
Share of manufacturing value added by industry group and industrialization level, 2005, 2010 and 7
2015 (percent)
Industrialized Developing and emerging
Industrial trends
economies industrial economies
Subsector 2005 2010 2015 2005 2010 2015
Manufacture of food products and beverages 65.8 59.5 53.7 34.2 40.5 46.3
Manufacture of tobacco products 52.0 38.7 29.2 48.0 61.3 70.8
Manufacture of textiles 49.0 33.7 27.5 51.0 66.3 72.5
Manufacture of wearing apparel; dressing and dyeing of fur 47.8 34.1 25.4 52.2 65.9 74.6
Tanning and dressing of leather; manufacture of luggage,
handbags, saddlery, harness and footwear 50.0 37.1 30.3 50.0 62.9 69.7
Manufacture of wood and of products of wood and cork,
except furniture; manufacture of articles of straw and
plaiting materials 77.4 69.5 64.0 22.6 30.5 36.0
Manufacture of paper and paper products 74.4 65.7 59.8 25.6 34.3 40.2
Publishing, printing and reproduction of recorded media 84.7 79.5 73.6 15.3 20.5 26.4
Manufacture of coke, refined petroleum products and
nuclear fuel 53.6 50.6 49.7 46.4 49.4 50.3
Manufacture of chemicals and chemical products 74.8 67.5 60.2 25.2 32.5 39.8
Manufacture of rubber and plastics products 76.4 68.5 64.7 23.6 31.5 35.3
Manufacture of other non-metallic mineral products 66.6 52.6 45.7 33.4 47.4 54.3
Manufacture of basic metals 56.6 46.4 38.1 43.4 53.6 61.9
Manufacture of fabricated metal products, except
machinery and equipment 82.8 75.5 70.5 17.2 24.5 29.5
Manufacture of machinery and equipment n.e.c. 84.3 74.2 70.8 15.7 25.8 29.2
Manufacture of computer, electronic and optical products 79.1 74.0 67.5 20.9 26.0 32.5
Manufacture of electrical machinery and apparatus n.e.c. 76.6 65.9 58.4 23.4 34.1 41.6
Manufacture of motor vehicles, trailers and semi-trailers 77.7 67.4 65.5 22.3 32.6 34.5
Manufacture of other transport equipment 80.7 77.4 75.5 19.3 22.6 24.5
Manufacture of furniture; manufacturing n.e.c. 81.6 76.1 71.5 18.4 23.9 28.5
Total manufacturing 72.3 64.1 58.6 27.7 35.9 41.4
Note: Manufacturing value added is in constant 2010 $. ISIC is International Standard Classification and n.e.c. is not elsewhere classified. Manufacture of computer, electronic and optical products
includes ISIC Rev. 3 codes 30,32 and 33. Industrialization level and industry group classifications are based on, respectively, Annex C1, Table C1.2 and Annex C2, Table C2.1.
Technology composition of manufacturing construction and a range of consumer goods. In 2015

value added medium-high and high-tech sectors accounted for
The best evidence of the change in the structure of 44.7 percent of MVA (Table 7.6).
manufacturing is the shift of industries from resource- Medium-high and high-tech products continue
based and low-tech activities to medium-high and to dominate manufacturing production in industrial-
high-tech activities. An increase in the share of ized economies, although their share of global MVA
medium-high and high-tech industries in total MVA from these products fell from 78.5 percent in 2005
indicates the country’s technological intensity in to 65.4 percent in 2015 (Figure 7.10). In develop-
manufacturing and its capacity to introduce new tech- ing economies, MVA in these subsectors more than
nology in other sectors. These industries produce the doubled between 2005 and 2015, and their share of
machinery and equipment required by manufactur- global MVA from them rose from 21.5 percent to
ing, agriculture (particularly livestock), mining and 34.6 percent.
165
“ Manufacturing has played a
crucial role in job creation, by
absorbing surplus labour from
traditional sectors and directing
it into higher‑paying activities
7 Table 7.6
Technology intensity composition of manufacturing value added by industrialization level,
development group, region and income, 2005, 2010 and 2015 (percent)
2005 2010 2015

Industrial trends
Medium- Medium- Medium-

Medium- high and Medium- high and Medium- high and
Grouping Low tech low tech high tech Low tech low tech high tech Low tech low tech high tech
World 30.8 27.0 42.2 29.8 26.3 43.9 29.0 26.3 44.7
Industrialized economies 28.6 25.6 45.8 27.4 24.3 48.3 26.1 24.1 49.9
North America 32.8 24.2 43.0 30.9 22.9 46.2 28.7 23.0 48.3
Europe 28.4 27.1 44.4 27.9 25.7 46.4 26.4 25.1 48.5
East Asia 22.1 23.8 54.1 21.2 22.4 56.5 20.8 22.1 57.1
Developing and emerging
industrial economies 36.4 30.8 32.8 34.0 29.9 36.1 33.2 29.5 37.3
Emerging industrial
economies 35.0 30.8 34.2 32.6 29.7 37.7 31.4 29.9 38.8
Other developing
economies 45.3 31.4 23.4 43.7 32.6 23.8 46.2 26.9 26.9
Least developed
countries 61.4 25.9 12.7 70.2 20.8 9.0 73.3 19.4 7.3
Africa 49.4 29.8 20.8 49.6 31.2 19.2 58.2 22.6 19.2
South Africa 42.4 29.9 27.8 43.9 28.6 27.5 44.5 26.8 28.7
Asia and Pacific 32.0 30.8 37.3 29.9 30.1 40.0 29.1 30.1 40.8
China 29.9 30.5 39.6 28.5 30.0 41.5 27.5 30.3 42.2
India 26.5 40.0 33.5 22.8 38.8 38.4 23.9 40.7 35.4
Europe 42.5 27.9 29.6 40.9 27.9 31.2 38.9 27.9 33.2
Poland 41.9 26.1 32.0 37.2 27.9 34.9 36.8 29.2 34.0
Turkey 41.2 27.2 31.6 40.6 27.4 32.0 38.2 26.9 35.0
Latin America 39.9 32.3 27.7 40.0 29.8 30.2 41.4 29.4 29.2
Mexico 33.0 33.7 33.3 34.0 30.9 35.1 32.1 28.1 39.9
By income
High income 29.0 25.6 45.4 27.7 24.4 47.9 26.4 24.2 49.3
Upper-middle income 34.7 31.3 34.0 32.4 30.1 37.5 30.8 30.1 39.1
Lower-middle income 38.4 29.6 32.0 36.6 29.5 33.9 39.1 27.1 33.8
Low income 63.2 24.9 11.8 71.4 20.3 8.3 73.8 19.5 6.7
Note: Manufacturing value added is in constant 2010 $. Regional, industrialization, income level and technology classifications are based on, respectively, Annex C1, Table C1.1, C1.2, C1.3 and
Annex C3, Table C3.2 (in this table Building and repairing of ships and boats is classified as medium-high and high technology sector).
Trends in employment 361 million in 2016 (Figure 7.11). The contribution of

Manufacturing has played a crucial role in job creation, manufacturing to total employment decreased, how-
by absorbing surplus labour from agriculture and other ever, from 14.4 percent to 11.1 percent in 2016.
traditional sectors and directing labour into higher-
paying activities. Global manufacturing employ- Industrialized economies
ment increased at an average annual rate of 0.4 per- As industrialized economies shifted to technology
cent between 1991 and 2016, reaching an estimated innovation, the number of manufacturing jobs fell,
166
“ Global manufacturing
employment increased at an
average annual rate of 0.4 percent
between 1991 and 2016, reaching
an estimated 361 million in 2016
Figure 7.10
Industrialized economies continue to dominate global medium-high and high-tech manufacturing 7
production
80
Share of medium-high and high technology manufacturing
value added in total manufacturing value added (percent)
Industrial trends
60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: All values are in constant 2010 $. Industrialization level and technology classifications are based on, respectively, Annex C1, Table C1.2 and Annex C3, Table C3.2 (specific to this figure is the
classification of Building and repairing of ships and boats within the medium-high and high technology sector).
Figure 7.11
A slightly increasing trend in world manufacturing employment
400
Manufacturing employment (millions)
300
200
100
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: UNIDO elaboration based on the databases Key Indicators of the Labour Market (2013 and 2015) and Trends Econometric Models (ILO 2016).
167
“ The number of people in
developing and emerging
industrial economies employed in
manufacturing rose from 215 million
in 1991 to 279 million in 2016
7 from 107 million in 1991 to 78 million in 2016, reduc-

ing the share of total employment from 21.7 percent
rose from 215 million in 1991 to 279 million in 2016.
The share in total employment slipped, however, from
to 13.2 percent (Figure 7.12). This decline was much 12.4 percent to 10.5 percent (Figure 7.14). In 2016
steeper than the global decline. manufacturing employment in developing and emerg-
Industrial trends
Manufacturing employment in industrialized econ- ing industrial economies accounted for 8.5 percent of
omies accounted for almost 5 percent of global employ- total global employment.
ment in 1991 but just 2.2 percent in 2016. Notable job China dominates employment in this group of
shedders included all five of the top industrialized econ- countries (Figure 7.15), employing about 80 million
omy manufactures (the United States, Japan, Germany, people in 2016—about the same number employed
the Republic of Korea and Italy). Although the United in industrialized economies. In 2016 the five major
States has the largest number of manufacturing jobs developing economies — C hina, India, Brazil,
among the five (Figure 7.13), its 2016 share of manufac- Indonesia and Mexico—accounted for 63.2 percent
turing jobs in total employment was the lowest (9.6 per- of manufacturing jobs in developing and emerging
cent). Germany had the largest share (19.2 percent). industrial economies and 5.4 percent of total global
Among other industrialized economies, the countries employment.
with the largest shares of manufacturing employment in Manufacturing’s share of total national employ-
total employment were Czechia (25.8 percent), Slovakia ment in China dropped from 13.9 percent in 1991 to
(22.3 percent) and Slovenia (21.3 percent). 10.4 percent in 2016. The share is the lowest among
the top five developing and emerging industrial
Developing and emerging industrial economies.
economies Manufacturing employment in Indonesia grew
The number of people in developing and emerging by an average rate of 3.4 percent a year between 1991
industrial economies employed in manufacturing and 2016. In 2010 it overtook Brazil in terms of the
Figure 7.12
The total number of jobs in manufacturing is decreasing in industrialized economies
125 25
industrialized economies (percent)

Share of manufacturing employment in total employment of
100
20
75 15
50 10
25 5
0
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

168
“ In 2016 manufacturing
employment in developing and
accounted for 8.5 percent of
total global employment
Figure 7.13
The major industrialized economies have seen manufacturing employment shrink 7
25
Industrial trends
20
United States
15
Japan
10
Germany
Italy
5
Republic of Korea
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure 7.14
The share of manufacturing employment in total employment diminished in developing and emerging
industrial economies against an increasing number of jobs
300 30
developing and emerging industrial economies (percent)

Share of manufacturing employment in total employment of
200 20
100
10
0
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

169
“ In 2016 the largest shares
of manufacturing jobs in total
employment in developing and
were in Belarus and Bulgaria
7 Figure 7.15
Manufacturing employment in developing and emerging industrial economies is highly dominated by
China
100
Industrial trends
China
75
India
50
25
Indonesia
Brazil
Mexico
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

number of manufacturing jobs. Manufacturing’s share increased after the global financial crisis, rising at
of total employment in Indonesia rose from 10.3 per- about the same rate as in developing and emerging
cent in 1991 to 14.2 percent in 2016. Despite an industrial economies (Figure 7.16).
increasing number of manufacturing jobs in India, the
share of manufacturing in total employment increased Trends in prices
only slightly—from 10.9 percent in 1991 to 11.8 per- The relative prices of manufactured goods declined
cent in 2016. In 2016 the largest shares of manu- between 1991 and 2016 (Figure 7.17). The drop in
facturing jobs in total employment in developing prices was more extensive in developing and emerging
and emerging industrial economies were in Belarus industrial economies than in industrialized economies
(21.6 percent), Bulgaria (19.0 percent) and Poland where relative prices of manufactured goods stabilized
(18.5 percent). after the global financial crisis.
Trends in value added per worker Trends in exports

Real value added per worker in manufacturing is Manufactured exports suffered a sharp decline in
higher than real GDP per worker, and the difference 2009 for all country groups. Export growth resumed
has been increasing. This global trend is also evident in after 2009, particularly in developing and emerging
countries at different stages of industrial development. industrial economies. World manufactured exports
In most developing and emerging industrial econ- peaked at $14,230 billion in 2014, before falling
omies, labour productivity in 1991–2014 was higher 9.7 percent to $12,854 billion in 2015 (Table 7.7).
in manufacturing than in the overall economy. In con- Exports dropped in all major economies, as a result
trast, in industrialized economies, real value added per of declines in commodity prices and exchange rates.
worker was lower in manufacturing than for the over- China, the world’s largest exporter of manufactured
all economy, although manufacturing productivity goods, saw its economic growth decelerate.
170
“ Manufactured exports suffered
a sharp decline in 2009 for all
country groups. After 2009, export
growth resumed particularly
in developing countries
Figure 7.16
Labour productivity in manufacturing is higher in industrialized economies than in developing and 7
emerging economies
Industrial trends
90 20
Real value added per worker (constant 2010 $, thousands)
Real value added per worker (constant 2010 $, thousands)

Manufacturing industries
80
Total economy 15
70
Manufacturing industries 10
60
Total economy
5
50
40 0
1991 1995 2000 2005 2010 2016 1991 1995 2000 2005 2010 2016

Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO 2017f) and on the databases Key Indicators of the Labour Market (2013 and 2015) and Trends Econometric
Models (ILO 2016).
Table 7.7
World manufacturing exports by industrialization level, development group, region and income,
selected years, 1996–2015 (current $, billions)
Grouping 1996 2000 2005 2010 2015

World 3,648.0 5,033.0 8,125.0 11,441.0 12,854.0
Industrialized economies 3,277.0 4,187.0 6,208.0 7,938.0 8,395.0
Developing and emerging industrial economies 370.0 845.0 1,916.0 3,503.0 4,459.0
Emerging industrial economies 366.0 754.0 1,715.0 3,131.0 4,025.0
Other developing economies 3.0 85.0 176.0 326.0 371.0
Least developed countries 1.0 6.0 25.0 46.0 63.0
Africa 2.0 38.0 91.0 190.0 145.0
Asia and Pacific 200.0 459.0 1,148.0 2,293.0 3,168.0
Europe 57.0 93.0 269.0 441.0 514.0
Latin America 111.0 255.0 409.0 579.0 632.0
By income
High income 3,309.0 4,111.0 6,131.0 7,848.0 8,328.0
Upper-middle income 278.0 773.0 1,676.0 2,995.0 3,783.0
Lower-middle income 61.0 143.0 296.0 557.0 688.0
Low income 1.0 5.0 21.0 41.0 55.0
Source: UNIDO elaboration based on the United Nations Comtrade database (UNSD 2017).
171
“ Global manufactured exports
grew 6.5 percent in 2000–2015,
much faster than MVA and GDP
7 Figure 7.17
Manufacturing industries tend to show a more persistent decline in relative prices than the overall
economy
a. Industrialized economies
Industrial trends
200 1.00
Value added price (deflator index, 1991 = 100)

175 0.95
150 0.90
125 0.85
100 0.80
75 0.75
0.70
50 1991 1995 2000 2005 2010 2014
b. Developing and emerging industrial economies

250 1.0
Value added price (deflator index, 1991 = 100)

200 0.9
150 0.8
100 0.7
50 0.6
1991 1995 2000 2005 2010 2014
Global manufactured exports grew 6.5 percent in Manufactured exports from industrialized econo-
2000–2015, much faster than MVA and GDP, driven mies reached $8,395 billion in 2015, after growing at
mainly by higher exports from developing and emerging an average annual rate of 4.8 percent in 2000–2015.
industrial economies (Table 7.8). Global manufacturing Manufactured exports from developing and emerging
exports accounted for 88.6 percent of global merchan- industrial economies grew at an average annual rate of
dise exports in 2015; exports from mining accounted 11.7 percent to $4,459 billion, more than five times
for 8.0 percent and agricultural exports for 3.2 percent. their value in 2000.
172
“ Developing and emerging
industrial economies increased
their share of manufacturing
exports from 16.8 percent in
2000 to 34.7 percent in 2015
Table 7.8
Average annual growth rate of manufactured
Developing and emerging industrial econo-
mies increased their share of manufacturing exports
7
exports by industrialization level,
development group, region and income, 2000– from 16.8 percent in 2000 to 34.7 percent in 2015
2015 (percent)
(Figure 7.18). The largest contributors were China,
Industrial trends
Grouping 2000–2015 Mexico and India, which together accounted for
World 6.5 71.0 percent of total manufactured exports in this
country group in 2015.
Industrialized economies 4.8
Globally, most manufactured exports are medium-
Developing and emerging industrial
economies 11.7 high and high-tech products, such as chemicals,
Emerging industrial economies 11.8 machinery and equipment, communications equip-
Other developing economies 10.4
ment and motor vehicles. They accounted for 60.0 per-
Least developed countries 16.6
cent of all manufactured exports in 2015 (Figure 7.19).
By region (world)
Asia and Pacific 13.7
Exports of these goods by developing and emerging
Europe 12.1 industrial economies increased by 12.6 percent a year
Latin America 6.2 between 2000 and 2015, raising their contribution
Africa 9.3 to world exports of these goods from 12.0 percent in
By income (world) 2000 to 30.0 percent in 2015.
High income 4.8
Upper-middle income 11.2
Manufactured exports per capita
Lower-middle income 11.0
Low income 16.8
Manufactured exports per capita reflect a country’s
ability to produce goods competitively and keep up
Note: Manufacturing exports are in current $. Regional, industrialization and income level
classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3. with technological changes. Globally, this figure rose
Figure 7.18
The structure of global manufacturing exports dominated by industrialized economies
100
Share in world manufactured exports (percent)
75
50
25
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: All values are in current $. Industrialization level classification is based on Annex C1, Table C1.2.
Source: UNIDO elaboration based on based on the United Nations Comtrade database (UNSD 2017).
173
“ China’s exports of
manufactured goods grew much
faster than the global rate
7 Figure 7.19
Medium-high and high-tech products continue
Figure 7.20
Growth trends in manufactured exports per
to dominate global manufactured exports capita
80 1,500
Manufactured exports (percent)
Manufactured exports per capita (current $, index, 1996 = 100)

Industrial trends

Medium-high and high tech
60
1,000
40
Medium-low tech 500

World
20
Low tech
0 0
1996 2000 2005 2010 2015 1996 2000 2005 2010 2015
Note: All values are in current $. Technology classification is based on Annex C3, Table C3.2 Note: Industrialization level classification is based on Annex C1, Table C1.2.
(in this figure Building and repairing of ships and boats is classified as medium-high and high Source: UNIDO elaboration based on based on the United Nations Comtrade database (UNSD
technology sector). 2017) and the Manufacturing Value Added 2017 database (UNIDO 2017f).
Source: UNIDO elaboration based on based on the United Nations Comtrade database (UNSD 2017).
to $1,969 in 2013, driven by industrialized economies. economies— China, Mexico, India, Thailand and
By 2015 it had fallen to $1,753 in 2015. Poland—accounted for 68 percent of the group’s total
In developing and emerging industrial econo- and 23 percent of the global total.
mies, the average annual growth rate of manu- Asia and Pacific was the largest regional exporter
factured exports per capita was 10.2 percent in in 2015, accounting for 71 percent of this group’s
2000–2015—a lmost 2.5 times as high as the 4.2 per- exports. The share of Latin American countries in
cent growth rate for industrialized economies (Figure the global total fell from 30 percent in 2000 to about
7.20). Per capita exports were still much lower ($732 14 percent in 2015. Mexico was the largest exporter in
against $6,778 in 2015). the Latin American region, with a 54 percent regional
share in 2015.
Manufactured exports from developing and Europe’s share in developing and emerging indus-
emerging industrial economies trial economies remained stable, at about 12 percent in
China is the world’s largest exporter of manufactured 2015. The regional leader was Poland, which increased
goods. Its exports of manufactured goods grew at an its group share to almost 4 percent.
average annual rate of 16 percent between 2000 and Despite impressive growth between 1996 and 2015,
2015 (to $2,249 billion)—much faster than the global Africa’s contribution to the world market remained
rate of 6 percent. China’s share of developing and low, at only 1 percent of the global share in 2015. Most
emerging industrial economies’ manufactured exports of its exports were low-tech manufactured goods.
increased to 51 percent and its global share to 18 per- Among developing and emerging industrial econo-
cent in 2015. mies as a whole, the share of medium-high and high-
In 2015 the five largest exporters of manufactured tech manufactured exports increased from 39 percent
goods among the developing and emerging industrial in 1996 to 52 percent in 2015 (Figure 7.21).
174
“ Globally, final consumption of
energy increased from 5,786 million
tonnes of oil equivalent in 1990 to
8,597 in 2014, a 49 percent rise
Figure 7.21
Medium-high and high-tech products accounting for more than half of manufactured exports in 7
developing and emerging industrial economies in 2015 (percent of country group’s manufactured exports)
1996 2006 2015
Industrial trends
Medium-high Low tech Low tech
and 29.5 29.7
Low tech Medium-high
high tech and Medium-high
38.9 45.2
high tech and
47.4 high tech
51.8
Medium-low Medium-low
tech tech
Medium-low 18.5
23.1
tech
15.9
Note: All values are in current $. Industrialization level and technology classifications are based on, respectively, Annex C1, Table C1.2. and Annex C3, Table C3.2 (in this figure Building and repairing of
ships and boats is classified as medium-high and high technology sector).
Trends in manufacturing energy total, were transport (2,627 MTOE), manufactur-

intensity ing (2,622 MTOE) and residential (2,142 MTOE)
Energy intensity is defined as energy consumption (Figure 7.22, panel a). The fastest growth in energy
per unit of MVA (less energy intensity means greater consumption was in mining (85 percent increase
energy efficiency). It is expressed in millions of tonnes been 1990 and 2014), transport (66 percent) and ser-
of oil equivalent (MTOE) divided by MVA in con- vices (65 percent). Energy consumption in the man-
stant 2010 dollars. ufacturing sector grew at an average annual rate of
Globally, final consumption of energy increased 2.8 percent in 2000–2014. Per capita final consump-
from 5,786 MTOE in 1990 to 8,597 MTOE in tion of energy grew by 13 percent in 2000–2014,
2014, a 49 percent rise. The three largest sectors in reaching almost 1.2 tonnes of oil equivalent in 2014
2014, which together accounted for 86 percent of the (Figure 7.22, panel b).
Figure 7.22
World final energy consumption, by sector
a. Total energy consumption b. Per capita energy consumption

10 1.2
World final energy consumption
(tonnes of oil equivalent, billions)
World final energy consumption

(tonnes of oil equivalent per capita)
1.0
8
0.8
6
0.6
4
0.4
2
0.2
0 0.0
1990 1995 2000 2005 2010 2014 1990 1995 2000 2005 2010 2014
Transport Manufacturing Residential Services Agriculture Other Mining Construction

Source: UNIDO elaboration based on World Energy Statistics and Balances © OECD/IEA 2017, www.iea.org/statistics. Licence: www.iea.org/t&c; as modified by UNIDO.
175
“ Global energy intensity in
manufacturing decreased by an
average annual rate of 1.3 percent
between 1990 and 2014
7 Figure 7.23
A declining trend in world manufacturing
The average annual growth of manufacturing
energy consumption (1.8 percent) was slower than
energy intensity
the growth of MVA (3.1 percent) in 1990–2014.
0.35
Tonnes of oil equivalent per $1,000 manufacturing value added (constant 2010 $)
MVA more than doubled in absolute value, whereas

Industrial trends
manufacturing energy consumption increased by only

52 percent (Figure 7.24).
Global energy intensity in manufacturing
0.30
decreased by an average annual rate of 1.3 percent
between 1990 and 2014. China had the highest con-
sumption of energy. Its absolute value increased by
a factor of more than four over this period, but its
0.25 manufacturing energy intensity fell by 70 percent,
the largest drop among all large energy consumers
(Figure 7.25). Energy intensity fell almost 50 percent
in the United States and 44 percent in India. Despite
0.20 the decline, India was the most energy-intensive man-
1990 1995 2000 2005 2010 2014
ufacturing economy in 2014. Brazil was the only large
Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO
2017f) and World Energy Statistics and Balances © OECD/IEA 2017, www.iea.org/statistics. manufacturer to see energy intensity increase over this
Licence: www.iea.org/t&c; as modified by UNIDO.
period.
Figure 7.24
Global diverging trends in manufacturing value added, manufacturing energy consumption and
manufacturing energy intensity
250
Index, 1990 = 100
Manufacturing value added (constant 2010 $)

200
150
Manufacturing energy consumption

(tonnes of oil equivalent, billions)
100
Manufacturing energy intensity

(tonnes of oil equivalent per $1,000
50 manufacturing value added, constant 2010 $)
0
1990 1995 2000 2005 2010 2014
Note: Manufacturing value added is in constant 2010 $.

Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO 2017f) and World Energy Statistics and Balances © OECD/IEA 2017, www.iea.org/statistics. Licence: www.
iea.org/t&c; as modified by UNIDO.
176
“ Energy intensity fell
almost 44 percent in India and
despite the decline, India was
the most energy‑intensive
manufacturing economy in 2014
Figure 7.25
The majority of economies tend to decrease manufacturing energy intensity 7
150
Index, 1990 = 100
Industrial trends
Brazil
100
Japan
Mexico
Germany
India
50
United States
China
0
1990 1995 2000 2005 2010 2014
Note: Manufacturing energy intensity is in tonnes of oil equivalent per $1,000 manufacturing value added (constant 2010 $).
Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database (UNIDO 2017f) and World Energy Statistics and Balances © OECD/IEA 2017, www.iea.org/statistics. Licence: www.
iea.org/t&c; as modified by UNIDO.
The various indicators presented in this chapter production capabilities, expanding manufacturing
provide a broad characterization of the main indus- production, employment and exports. The final chap-
trial development trends observed at the world and ter of the report complements this analysis by provid-
regional level during the last decades. These trends ing further evidence on the industrial competitiveness
reflect a changing global landscape in which some of countries as reflected in the most recent estimates of
countries gained ground by improving their industrial UNIDO’s Competitive Industrial Performance index.
Note
1. In this chapter, all references to 2016 values
derived from the Manufacturing Value Added
database (2017 edition; UNIDO 2017f) are pre-
liminary estimates.
177
Chapter 8
The Competitive Industrial

Performance index
The Competitive Industrial INDint is expressed by the share of manufacturing

Performance index value added (MVA) in total gross domestic prod-
UNIDO assesses and benchmarks industrial com- uct (GDP) (Indicator 3: MVA sh) and the share of
petitiveness through its Competitive Industrial medium-high and high-tech MVA in total MVA
Performance (CIP) index. It captures countries’ ability (Indicator 4: MHVA sh). The second composite indi-
of to produce and export manufactures competitively cator, MXQual, comprises the share of medium-high
and to structurally transform. and high-tech manufactured exports in total manu-
The CIP index is a performance (or outcome) indi- factured exports (Indicator 5: MHXsh) and the share
cator. Its indicators help countries learn about the of manufactured exports in total exports (Indicator
process of change, identify whether industrial policies 6: MXsh).
are working and figure out how to make their manu- The third dimension of competitiveness is rep-
facturing sectors more efficient. These indicators stand resented by the country’s impact on world manufac-
in contrast to “process” indicators, which are based on turing, as measured by its share world manufacturing
research-based evidence and can be used to validate or value added (Indicator 7: ImWMVA) and world man-
identify the processes that contributed to the observed ufacturing trade (Indicator 8: ImWMT).
outcomes.
Because technological learning is a cumulative, Definitions of indicators
long-run process, CIP rankings tend to remain sta-
ble in the short run. Only in the medium to long Composite index
term do industrial statistics and structural economic The final composite index is based on three dimen-
variables reveal the effect of learning. Structural sions and eight indicators:
transformation—i ndustry-wide or economy-wide • Dimension 1: Capacity to produce and export
—is a long, path-dependent process. When leaps manufactured goods
occur, they signal responses to major improvements Indicator 1: MVApc
or deteriorations in the basic conditions of industrial Indicator 2: MXpc
activity. • Dimension 2: Technological deepening and
The 2015 CIP index includes eight indicators, upgrading
defined along three dimensions (Figure 8.1 and Table Composite indicator combining indicators 3
8.1). The first dimension covers a country’s capacity to and 4: INDint = (MHVAsh + MVAsh)/2
produce and export manufactures. It is captured by Composite indicator combining indicators 5
two indicators: manufacturing value added per capita and 6: MXQual = (MHXsh + MXsh)/2
(Indicator 1: MVApc) and manufactured exports per • Dimension 3: World impact
capita (Indicator 2: MXpc). Indicator 7: ImWMVA
The second dimension describes a country’s level Indicator 8: ImWMT
of technological deepening and upgrading. It is cap- The composite index is the geometric mean of
tured by two composite indicators: industrializa- MVApc , MXpc , INDint , MXQual , ImWMVA and
tion intensity (INDint) and export quality (MXQual). ImWMT.
179
“ Countries in the top quintile
accounted for more than 80 percent
of global MVA and 86 percent of
global manufacturing trade
8 Figure 8.1
Composition of the Competitive Industrial Performance index
The Competitive Industrial Performance index
r1 Indi
ato cat
ic or
Ind 2
Manufacturing Manufacturing
value added per capita exports per capita
(MVApc ) (MXpc )
1st DIMENSION
Capacity to produce and
Com
export manufactures
posite of
Industrialization
Indicator 8
Country-specific Competitive intensity1

Industrial
indicators 3 a
impact on world (INDint )
manufacturing Performance =
exports (CIP) 2nd DIMENSION
3rd DIMENSION Technological MHVAsh + MVAsh
(ImWMT )
World impact deepening and 2
upgrading
nd 4
Country-specific impact Export quality2 (MXQual )

Co
on world manufacturing =
m
po
value added MHXsh + MXsh sit
(ImWMVA ) 2
eo
r7 f in
icato dic
ator
Ind 5 and s
6
Note: The composite CIP Index is computed as the equal-weighted geometric mean of MVA pc, MX pc, INDint, MXQual, ImWMVA and ImWMT. Indicator 3 (MHVA sh) captures the share of a country’s
medium- and high-tech manufacturing value added of its total manufacturing value added. Indicator 4 (MVA sh) is simply the share of a country’s manufacturing value added of its total production.
Indicator 5 (MHX sh) is the share of a country’s medium- and high-tech manufacturing exports of its total manufacturing exports. Indicator 6 (MX sh) denotes the share of a country’s manufacturing exports
of its total exports.
Source: UNIDO (2017c).
180
“ In 2015 Germany was the world’s
most industrially competitive country,
for the 22nd consecutive year
Table 8.1
Definition of indicators 8
Indicator Description
Manufacturing value MVApc captures the level of a country’s industrialization. It is expressed per capita to adjust

added (MVA) per capita for country size. Unlike gross output, MVA is free of double-counting, because it excludes
(MVApc) the cost of intermediate consumption. If all domestic production in every country were fully
and equally exposed to international competition, this indicator would capture industrial
competitiveness. However, exposure is limited by barriers to trade—natural and otherwise—
such as policies, transport costs, natural resource endowments, technological infrastructure,
legal and institutional variations and information gaps. In many countries, the competitive
pressure is less intense for manufactures aimed at the home market than the foreign market.
Manufacturing exports MXpc captures the ability of a country to produce goods competitively and implicitly to keep
per capita (MXpc) up with technological changes. It is expressed per capita to adjust for country size. Because
export values do not reflect the share of local value added in a product, it is not possible to
account for variations in local manufacturing capabilities across countries. As there is no
direct way to adjust for this variation, one must consider individual country evidence of low-
value-added assembly when analysing the CIP index.
Share of medium-high MHVAsh captures the technological complexity of manufacturing. The higher the share of
and high-tech MVA in medium-high and high-tech MVA in total MVA, the more technologically complex the industrial
total MVA (MHVAsh) structure of a country and its overall industrial competitiveness. The more complex the
production structure, the greater the opportunities for learning and technological innovation.
Share of MVA in total MVAsh indicates the contribution of manufacturing to total production.
gross domestic product
(MVAsh)
Share of medium- MHXsh captures the technological content and complexity of exports. The share of medium-
high and high-tech high and high-tech products in manufactured exports is considered jointly with the previous
manufactured exports indicator, because MHXsh may differ substantially from MHVAsh in some circumstances. In
in total manufactured large import-substituting developing countries, for example, the structure of MVA is more
exports (MHXsh) complex than the structure for manufactured exports.
Share of manufactured MXsh captures manufacturing weight in export activity.
exports in total exports
(MXsh)
Country-specific impact ImWMVA measures a country’s share in world MVA, which captures a country’s relative
on world manufacturing performance in, and impact on, world manufacturing.
value added (ImWMVA)
Country-specific impact ImWMT measures a country’s share in world manufactured exports. It shows a country’s
on world manufacturing competitive status relative to other countries in international markets. Gains in world market
exports (ImWMT) share reflect greater competitiveness, losses signal deterioration of competitiveness.
Source: UNIDO elaboration based on UNIDO (2002, 2014b and 2017c).
The 2015 CIP rankings of Korea) plus China. Together they accounted for
The 2015 CIP ranking includes 148 economies. 58 percent of global MVA.
Four new countries are listed compared with the In 2015 Germany was the world’s most industri-
CIP index 2014: Angola, Maldives, Montenegro ally competitive country, for the 22nd consecutive
and Myanmar. These economies accounted for about year. It scored high on all three dimensions. Germany
99 percent of world manufactured exports and MVA accounted for almost 10 percent of world manufac-
in 2015. Table 8.2 displays them by five colour-high- turing trade and more than 5 percent of world MVA.
lighted quintiles: top, upper-middle, middle, lower- Medium-high and high-tech exports accounted for
middle and bottom. 74 percent of its exports and 64 percent of its MVA.
Countries in the top quintile accounted for more Germany’s capacity to produce and export manufac-
than 80 percent of global MVA and 86 percent of tures improved in 2015. The share of medium-high
global manufacturing trade. The five most competi- and high-tech value added in total MVA grew by an
tive countries included four high-income countries average annual rate of 1.1 percent in 1995–2015, to
(Germany, Japan, the United States and the Republic 61.0 percent.
181
“ Germany’s share of medium‑high
and high‑tech value added in
total MVA grew by an average
annual rate of 1.1 percent in
1995–2015, to 61 percent
8 Table 8.2
Competitive Industrial Performance index, 2015
Top quintile Upper-middle quintile Middle quintile Lower-middle quintile Bottom quintile
CIP CIP CIP CIP

ranking index Country ranking index Country
1 0.541 Germany 38 0.093 Indonesia
2 0.406 Japan 39 0.086 India
3 0.401 China 40 0.083 Lithuania
4 0.394 United States 41 0.080 Viet Nam
5 0.393 Korea, Republic of 42 0.076 Philippines
6 0.339 Switzerland 43 0.074 United Arab Emirates
7 0.288 Belgium 44 0.073 Luxembourg
8 0.284 Netherlands 45 0.073 Belarus
9 0.282 Singapore 46 0.073 Argentina
10 0.281 Italy 47 0.072 South Africa
11 0.278 France 48 0.070 Qatar
12 0.272 Ireland 49 0.068 New Zealand
13 0.269 Taiwan Province of China 50 0.066 Estonia
14 0.236 United Kingdom 51 0.063 Chile
15 0.236 Austria 52 0.061 Kuwait
16 0.234 Sweden 53 0.061 Greece
17 0.218 Czechia 54 0.059 Bahrain
18 0.216 Canada 55 0.058 Trinidad and Tobago
19 0.202 Spain 56 0.055 Croatia
20 0.186 Mexico 57 0.054 Bulgaria
21 0.176 Malaysia 58 0.048 Latvia
22 0.174 Denmark 59 0.048 Iran, Islamic Republic of
23 0.168 Poland 60 0.044 Costa Rica
24 0.161 Thailand 61 0.044 Peru
25 0.155 Finland 62 0.043 Tunisia
26 0.155 Slovakia 63 0.043 Venezuela, Bolivarian Republic of
27 0.150 Hungary 64 0.043 Morocco
28 0.142 Israel 65 0.043 Ukraine
29 0.129 Turkey 66 0.042 Oman
30 0.127 Australia 67 0.040 Kazakhstan
31 0.119 Norway 68 0.040 Serbia
32 0.114 Russian Federation 69 0.039 Colombia
33 0.110 Slovenia 70 0.037 Egypt
34 0.105 Romania 71 0.035 Iceland
35 0.105 Portugal 72 0.034 Malta
36 0.103 Brazil 73 0.032 Guatemala
37 0.100 Saudi Arabia 74 0.032 El Salvador
182
“ Japan ranked second, even
though its CIP score declined
by an average of 1.3 percent a
year between 1990 and 2015

Competitive Industrial Performance index, 2015 8
CIP CIP CIP CIP
ranking index Country ranking index Country

75 0.031 Sri Lanka 112 0.010 Syrian Arab Republic
76 0.031 Jordan 113 0.010 Fiji
77 0.031 Bangladesh 114 0.010 Moldova, Republic of
78 0.031 Uruguay 115 0.010 Papua New Guinea
79 0.028 Macedonia, Former Yugoslav 116 0.009 Cameroon
Republic of
117 0.009 Bahamas
80 0.026 Pakistan
118 0.008 Zambia
81 0.026 Swaziland
119 0.008 Panama
82 0.026 Nigeria
120 0.008 Tanzania, United Republic of
83 0.025 Hong Kong SAR, China
121 0.007 Ghana
84 0.025 Botswana
122 0.007 Kyrgyzstan
85 0.025 Bosnia and Herzegovina
123 0.007 Montenegro
86 0.024 Namibia
124 0.006 Madagascar
87 0.024 Mauritius
125 0.005 Belize
88 0.023 Lebanon
126 0.005 Uganda
89 0.023 Brunei Darussalam
127 0.004 Mozambique
90 0.021 Ecuador
128 0.004 Nepal
91 0.020 Cambodia
129 0.004 Iraq
92 0.020 Algeria
130 0.004 Malawi
93 0.018 Honduras
131 0.004 Niger
94 0.016 Cyprus
132 0.003 Angola
95 0.015 Myanmar
133 0.003 Haiti
96 0.015 Georgia
134 0.003 Cabo Verde
97 0.014 Paraguay
135 0.003 Yemen
98 0.013 Bolivia, Plurinational State of
136 0.003 Bermuda
99 0.013 Jamaica
137 0.003 Tajikistan
100 0.012 Mongolia
138 0.003 Saint Lucia
101 0.012 Armenia
139 0.002 Rwanda
102 0.011 Kenya
140 0.002 Afghanistan
103 0.011 Azerbaijan
141 0.002 Macao SAR, China
104 0.011 Côte d’Ivoire
142 0.002 Maldives
105 0.011 Barbados
143 0.002 Central African Republic
106 0.011 State of Palestine
144 0.001 Burundi
107 0.011 Albania
145 0.000 Eritrea
108 0.011 Suriname
146 0.000 Ethiopia
109 0.011 Gabon
147 0.000 Gambia
110 0.011 Congo, Republic of the
148 0.000 Tonga
111 0.010 Senegal
Note: MVA is manufacturing value added. CIP is Competitive Industrial Performance.
Source: UNIDO elaboration based on the Competitive Industrial Performance Index 2017 database (UNIDO 2017b).
183
“ Germany and Japan retained
their positions; the rankings of most
other industrialized economies were
lower in 2015 than they were in 2010
8 Table 8.3
Industrial competitiveness ranking and selected indicators for industrialized economies and world
ranking comparison, 2010 and 2015
Impact of
a country
Manufactured Impact of a on world
MVA per exports country on manufactures
Group World ranking capita per capita world MVA trade
ranking (2010 $) (current $) (percent) (percent)
2015 2010 2015 Country 2015 2015 2015 2015
1 1 1 Germany 9,429.7 14,625.5 6.3 9.8
2 2 2 Japan 8,495.8 4,484.6 9.0 4.7
3 3 4 United States 6,072.6 3,000.5 16.3 8.0
4 4 5 Korea, Republic of 7,336.4 10,189.4 3.1 4.3
5 5 6 Switzerland 14,403.8 24,652.2 1.0 1.7
6 10 7 Belgium 5,961.3 31,031.2 0.6 2.9
7 11 8 Netherlands 5,507.6 23,069.0 0.8 3.3
8 7 9 Singapore 9,536.5 27,476.0 0.4 1.3
9 8 10 Italy 4,840.0 6,837.9 2.4 3.4
10 9 11 France 4,350.9 6,772.2 2.3 3.6
11 14 12 Ireland 12,753.2 25,009.8 0.5 1.0
12 12 13 Taiwan Province of China 4,643.9 11,528.8 0.9 2.2
13 15 14 United Kingdom 3,508.9 5,541.1 1.9 3.0
14 16 15 Austria 8,337.8 15,193.3 0.6 1.1
15 13 16 Sweden 8,567.7 12,742.7 0.7 1.0
16 19 17 Czechia 5,049.3 13,930.5 0.4 1.2
17 17 18 Canada 4,840.2 6,771.4 1.4 2.0
18 18 19 Spain 3,479.5 5,005.3 1.3 1.9
19 21 21 Malaysia 2,533.9 5,547.0 0.6 1.4
20 22 22 Denmark 6,922.6 12,370.3 0.3 0.6
21 20 25 Finland 6,758.1 9,201.6 0.3 0.4
22 29 26 Slovakia 3,865.8 13,105.1 0.2 0.6
23 27 27 Hungary 2,669.9 9,223.6 0.2 0.8
24 25 28 Israel 4,163.9 7,627.6 0.3 0.5
25 28 30 Australia 4,158.0 3,607.9 0.8 0.7
26 30 31 Norway 6,651.1 6,218.0 0.3 0.3
27 33 32 Russian Federation 1,437.2 1,091.0 1.7 1.3
28 34 33 Slovenia 4,366.7 11,631.9 0.1 0.2
29 35 35 Portugal 2,588.3 4,950.3 0.2 0.4
30 43 40 Lithuania 2,802.8 7,536.3 0.1 0.2
31 54 43 United Arab Emirates 3,572.0 3,630.5 0.3 0.3
32 44 44 Luxembourg 5,192.5 19,415.0 0.0 0.1
33 56 48 Qatar 7,006.6 3,363.5 0.1 0.1
34 46 49 New Zealand 3,711.1 3,395.2 0.1 0.1
35 51 50 Estonia 2,554.6 8,835.7 0.0 0.1
184
“ China improved its position,
rising to third place in 2015.
Mexico and Poland climbed
three places, thanks to increases
in their industrial intensity

Industrial competitiveness ranking and selected indicators for industrialized economies and world 8
Impact of

a country
2015 2010 2015 Country 2015 2015 2015 2015
36 49 52 Kuwait 2,273.9 5,210.5 0.1 0.2
37 45 54 Bahrain 3,238.1 6,016.9 0.0 0.1
38 71 71 Iceland 6,216.7 3,726.6 0.0 0.0
39 65 72 Malta 2,241.7 5,347.3 0.0 0.0
40 73 83 Hong Kong SAR, China 504.5 749.5 0.0 0.0
41 132 136 Bermuda 828.4 120.8 0.0 0.0
42 131 141 Macao SAR, China 496.0 38.0 0.0 0.0
Note: All values for world manufacturing value added (MVA) are in constant 2010 $, and values for world manufactures trade are in current $. Yellow indicates a fall in the rankings from 2010; blue-
green is a rise; neither colour indicates no change.
Table 8.4
Industrial competitiveness ranking and selected indicators for emerging industrial economies and
Impact of
a country
2015 2010 2015 Country 2015 2015 2015 2015
1 6 3 China 2047.6 1601.4 23.5 18.4
2 23 20 Mexico 1592.7 2611.7 1.7 2.8
3 26 23 Poland 2481.3 4445.3 0.8 1.4
4 24 24 Thailand 1657.4 2754.8 0.9 1.6
5 32 29 Turkey 1813.8 1549.0 1.2 1.0
6 36 34 Romania 1909.4 2697.1 0.3 0.4
7 31 36 Brazil 1202.7 540.4 2.1 0.9
8 37 37 Saudi Arabia 2462.4 1886.8 0.6 0.5
9 38 38 Indonesia 830.1 393.4 1.8 0.8
10 41 39 India 298.0 167.9 3.3 1.8
11 42 45 Belarus 1496.6 2372.5 0.1 0.2
12 39 46 Argentina 1859.2 602.1 0.7 0.2
13 40 47 South Africa 952.2 876.5 0.4 0.4
14 48 51 Chile 1481.4 1865.0 0.2 0.3
15 47 53 Greece 1553.4 2034.1 0.1 0.2
16 55 56 Croatia 1635.6 2593.8 0.1 0.1
185
“ Bulgaria and Latvia moved from
the third to the second quintile by
increasing their export capacity
and technological deepening
8 Table 8.4 (continued)

Industrial competitiveness ranking and selected indicators for emerging industrial economies and
Impact of
a country
2015 2010 2015 Country 2015 2015 2015 2015
17 60 57 Bulgaria 980.4 2589.4 0.1 0.2
18 62 58 Latvia 1539.0 4713.9 0.0 0.1
19 64 60 Costa Rica 1460.9 1393.0 0.1 0.1
20 61 62 Tunisia 683.3 1125.2 0.1 0.1
21 52 63 Venezuela, Bolivarian Republic of 1561.8 427.2 0.4 0.1
22 57 65 Ukraine 342.4 609.0 0.1 0.2
23 68 66 Oman 1533.1 1901.3 0.1 0.1
24 66 67 Kazakhstan 1072.1 637.0 0.2 0.1
25 72 68 Serbia 643.6 1258.0 0.0 0.1
26 67 69 Colombia 813.5 234.0 0.3 0.1
27 76 78 Uruguay 1652.9 926.2 0.0 0.0
28 89 79 Macedonia, Former Yugoslav
Republic of 629.2 2001.5 0.0 0.0
29 86 87 Mauritius 1291.7 1260.0 0.0 0.0
30 81 89 Brunei Darussalam 4559.7 1013.2 0.0 0.0
31 92 94 Cyprus 843.2 649.3 0.0 0.0
32 98 108 Suriname 1268.2 529.9 0.0 0.0
Japan ranked second, even though its CIP score The United States, the world’s second largest con-
declined by an average of 1.3 percent a year between tributor to world MVA in 2015, ranked fourth. The
1990 and 2015. It remains the world’s leader on export Republic of Korea ranked fifth.
quality. It needs to deepen and upgrade its technologi-
cal level, as, the shrinking size of its workforce means Performance of industrialized economies
that increases in value added will need to come from Germany and Japan retained their positions; the rank-
productivity gains. ings of most other industrialized economies were
China, the world’s largest manufacturing producer lower in 2015 than they were in 2010 (Table 8.3).
and exporter, moved from fifth to third place in 2015. Other countries in the top quintile include
Its economy accounted for 18.4 percent of world trade Switzerland, Belgium, the Netherlands and Singapore.
in manufactured goods and 23.5 percent of global All of them have very high manufactured exports per
MVA. Manufactured exports represented almost capita and large shares of medium-high and high-
97 percent of China’s total exports. Despite fast eco- tech activities in trade and production. Belgium, the
nomic growth, China still lagged other industrial econ- Netherlands, Slovakia and Lithuania moved up by
omies in manufacturing per capita and manufactured three places since 2010; Ireland moved up two places.
exports per capita. Its capacity to produce and export The United Arab Emirates climbed eleven spots and
manufactures resembles that of Turkey and Oman. Qatar rose by eight.
186
“ Viet Nam rose by 18 places and
the Philippines by 11; both improved
their performance in all dimensions
Table 8.5
Industrial competitiveness ranking and selected indicators for other developing economies and 8

Impact of
a country
2015 2010 2015 Country 2015 2015 2015 2015
1 59 41 Viet Nam 336.5 1,469.2 0.3 1.1
2 53 42 Philippines 594.0 544.8 0.5 0.5
3 50 55 Trinidad and Tobago 2,738.9 5,564.0 0.0 0.1
4 58 59 Iran, Islamic Republic of 708.2 341.8 0.5 0.2
5 63 61 Peru 843.0 563.6 0.2 0.1
6 69 64 Morocco 474.5 511.8 0.1 0.1
7 70 70 Egypt 436.6 164.0 0.3 0.1
8 75 73 Guatemala 550.7 470.4 0.1 0.1
9 77 74 El Salvador 745.5 834.2 0.0 0.0
10 78 75 Sri Lanka 598.3 376.1 0.1 0.1
11 74 76 Jordan 650.3 677.1 0.0 0.0
12 79 80 Pakistan 146.5 94.2 0.2 0.1
13 80 81 Swaziland 1,441.3 888.9 0.0 0.0
14 88 82 Nigeria 254.4 91.1 0.4 0.1
15 90 84 Botswana 454.2 2,683.5 0.0 0.1
16 84 85 Bosnia and Herzegovina 527.0 1,075.9 0.0 0.0
17 87 86 Namibia 603.3 1,759.4 0.0 0.0
18 83 88 Lebanon 703.5 446.7 0.0 0.0
19 85 90 Ecuador 634.9 223.3 0.1 0.0
20 91 92 Algeria 263.7 272.2 0.1 0.1
21 94 93 Honduras 376.4 325.3 0.0 0.0
22 100 96 Georgia 428.3 283.8 0.0 0.0
23 105 97 Paraguay 411.9 236.2 0.0 0.0
24 97 98 Bolivia, Plurinational State of 258.3 236.5 0.0 0.0
25 96 99 Jamaica 361.3 379.9 0.0 0.0
26 113 100 Mongolia 217.3 927.1 0.0 0.0
27 111 101 Armenia 410.9 305.3 0.0 0.0
28 104 102 Kenya 118.6 58.9 0.0 0.0
29 103 103 Azerbaijan 307.3 161.5 0.0 0.0
30 102 105 Barbados 783.6 754.8 0.0 0.0
31 115 106 State of Palestine 291.2 171.8 0.0 0.0
32 106 107 Albania 273.1 421.9 0.0 0.0
33 110 109 Gabon 471.5 647.7 0.0 0.0
34 112 110 Congo, Republic of the 136.8 560.3 0.0 0.0
35 95 112 Syrian Arab Republic 56.5 240.3 0.0 0.0
187
“ The contribution of least
developed countries to world
MVA (0.6 percent) and total
manufacturing trade (0.4 percent)
was negligible in 2015
8 Table 8.5 (continued)

Industrial competitiveness ranking and selected indicators for other developing economies and
Impact of
a country
2015 2010 2015 Country 2015 2015 2015 2015
36 114 113 Fiji 534.5 422.8 0.0 0.0
37 119 114 Moldova, Republic of 189.9 198.0 0.0 0.0
38 116 115 Papua New Guinea 104.4 324.5 0.0 0.0
39 109 116 Cameroon 183.5 45.6 0.0 0.0
40 108 117 Bahamas 722.9 352.5 0.0 0.0
41 118 119 Panama 631.8 70.9 0.0 0.0
42 125 121 Ghana 90.6 79.0 0.0 0.0
43 122 122 Kyrgyzstan 149.6 83.9 0.0 0.0
44 121 123 Montenegro 309.8 353.3 0.0 0.0
45 124 125 Belize 320.7 368.6 0.0 0.0
46 147 129 Iraq 112.7 9.1 0.0 0.0
47 133 132 Angola 206.4 20.4 0.0 0.0
48 136 134 Cabo Verde 195.4 71.2 0.0 0.0
49 127 137 Tajikistan 48.9 15.5 0.0 0.0
50 135 138 Saint Lucia 188.5 318.9 0.0 0.0
51 140 142 Maldives 263.6 77.7 0.0 0.0
52 148 148 Tonga 233.0 16.0 0.0 0.0
green rise is a rise; neither colour indicates no change.
Table 8.6
Industrial competitiveness ranking and selected indicators for least developed countries and world
Impact of
a country
2015 2010 2015 Country 2015 2015 2015 2015
1 82 77 Bangladesh 182.5 151.6 0.2 0.2
2 101 91 Cambodia 172.2 513.1 0.0 0.1
3 99 95 Myanmar 241.5 56.8 0.1 0.0
4 107 111 Senegal 120.8 104.5 0.0 0.0
5 117 118 Zambia 126.2 66.6 0.0 0.0
6 120 120 Tanzania, United Republic of 54.9 47.3 0.0 0.0
7 123 124 Madagascar 55.4 38.7 0.0 0.0
188
“ Between 2010 and 2015 only
10 countries changed quintile

Industrial competitiveness ranking and selected indicators for least developed countries and world 8
Impact of

a country
2015 2010 2015 Country 2015 2015 2015 2015
8 129 126 Uganda 55.0 16.1 0.0 0.0
9 137 127 Mozambique 43.3 25.1 0.0 0.0
10 128 128 Nepal 40.6 17.8 0.0 0.0
11 130 130 Malawi 46.7 16.5 0.0 0.0
12 138 131 Niger 24.0 34.7 0.0 0.0
13 134 133 Haiti 73.1 6.2 0.0 0.0
14 126 135 Yemen 65.6 4.7 0.0 0.0
15 142 139 Rwanda 34.1 17.7 0.0 0.0
16 139 140 Afghanistan 67.4 2.9 0.0 0.0
17 141 143 Central African Republic 52.7 3.7 0.0 0.0
18 143 144 Burundi 21.8 3.7 0.0 0.0
19 146 145 Eritrea 29.6 0.5 0.0 0.0
20 145 146 Ethiopia 19.5 3.6 0.0 0.0
21 144 147 Gambia 26.1 0.4 0.0 0.0
Performance of emerging industrial Figure 8.2

Changes in Competitive Industrial Performance
economies index among economies in the top quintile
China improved its position, rising to third place in
China
2015 (Table 8.4). Mexico and Poland climbed three Czechia
Korea, Republic of
places, thanks to increases in their industrial intensity. Slovakia
Poland
Turkey
Bulgaria and Latvia moved from the third to the sec- Hungary
Thailand
ond quintile by increasing their export capacity and Switzerland
Austria
technological deepening, switching places with the Germany
Australia
Bolivarian Republic of Venezuela and Ukraine, which Netherlands
Israel
Malaysia
were downgraded. Among the BRICS (Brazil, the Singapore
Taiwan Province of China
Russian Federation, India, China and South Africa), Mexico
Denmark
China, India and the Russian Federation climbed, and Belgium
Spain
Brazil and South Africa slipped. Ireland
Sweden
Finland
France
Italy
Performance of “other developing United Kingdom
Japan 2000–2015
economies” United States
Canada
1990–2015
Viet Nam rose by 18 places and the Philippines by 11; –0.2 –0.1 0.0 0.1 0.2 0.3 0.4
Decliners Advancers
both improved their performance in all dimensions Change in Competitive Industrial Performance Index
(Table 8.5). A strength of the Philippines is the degree Source: UNIDO elaboration based on the Competitive Industrial Performance Index 2017
of technological deepening and upgrading, which database (UNIDO 2017b).
189
“ Countries outside the top
quintile with large gains included
Nigeria (which rose 51 places),
Viet Nam (39) and Myanmar (33)
8 gives it potential to become the next hub of innova-

tion and human capital development in South and
52nd to 23rd. Other very competitive countries that
improved their ranks sharply were Czechia (twelve-
South-East Asia. place rise), Slovakia (twelve-place rise) and Turkey
Trinidad and Tobago fell five places. Botswana (eleven-place rise). Thailand climbed ten places and
and the Republic of Moldova moved up a quintile, dis- Malaysia seven. Mexico rose eleven places to reach
placing Ecuador and Panama, respectively. 20th.
Among countries in the top quintile, the United
Performance of least developed countries Kingdom, Italy, Canada, Finland and Australia saw
The contribution of least developed countries to their rankings fall between 1990 and 2015. Both
world MVA (0.6 percent) and total manufactur- Canada and the United States were hit hard by the
ing trade (0.4 percent) was negligible in 2015. It was 2007–2008 financial crisis. The subsequent oil price
dominated by a few countries, including Bangladesh shock caused Canada to slip ten places. Canada’s tech-
and Cambodia (Table 8.6). Most countries are in the nological deepening and upgrading is just a third that
bottom quintile of the CIP ranking. Average MVA of the average country in the top twenty.
per capita in this group was $74 and average manu- Germany and Japan remained in first and second
factured exports per capita $54. These economies lack places. China replaced the United States in third
the capacity to produce and export manufactured position.
goods. Among countries outside the top quintile, Viet
Nam gained 53 places to reach 41st, as years of dedi-
Changes in industrial competitiveness cated policies to opening the country’s boarders to
Movements between performance quintiles are infre- trade and investments paid off.
quent and typically take place at the crossover-points. Both Macao (SAR, China) and Hong Kong (SAR,
Between 2010 and 2015 only 10 countries changed China) tumbled in the rankings—by 85 and 62 places,
quintile. Rapid growth of manufactured exports and respectively—as a result of severe deindustrialization
production per capita pushed Turkey into the top and a shift to services. Among the BRICS (excluding
quintile, edging out Norway. Four other countries China), only India improved its ranking (by 21 posi-
improved their industrial performance and moved to tions to 39th). Brazil, the Russian Federation and
a higher quintile (Bulgaria and Latvia—from the mid- South Africa lost ground. There is still a wide gap
dle to the upper-middle quintile; Botswana—from the between China and the other BRICS: China leads the
lower-middle to the middle quintile; the Republic of Russian Federation (the second-place country in the
Moldova—from the bottom to the lower-middle quin- group) by 29 places.
tile). The Bolivarian Republic of Venezuela, Ukraine,
Ecuador and Panama lost their rankings and fell to a Changes between 2000 and 2015
lower quintile than in 2010. China, Czechia, Slovakia and Poland enjoyed impres-
Figure 8.2 shows long-term changes in industrial sive gains between 2000 and 2015. Slovakia jumped
competitiveness for the top quintile. Among the most twelve places, driven mainly by rapid growth in
competitive countries, China and Poland saw sharp per capita manufactured exports and technological
upward shifts between 1990 and 2015. upgrading. Other countries lost ground: Canada,
Finland, Italy and Australia fell by 6–13 places.
Changes between 1990 and 2015 Among emerging industrial economies, Turkey
China and Poland enjoyed the biggest changes in climbed five places, earning a position in the top quin-
rankings, each moving up 29 positions between 1990 tile. The Republic of Korea also performed well, rising
and 2015—China from 32nd to 3rd and Poland from to fourth in the world.
190
“ The 2015 CIP Index ranking
shows a global manufacturing
sector recovering despite
economic and political insecurity
Countries outside the top quintile with large gains

included Nigeria (which rose 51 places), Viet Nam
economic and political insecurity and mistrust in the
benefits of globalization.
8
(39) and Myanmar (33). Although Nigeria expanded Increasing a country’s technological deepen-
its manufacturing production and trade, its share in ing and upgrading is the key driver of the structural

medium-high and high-tech manufactured exports change process needed for emerging and develop-
declined. Viet Nam improved its performance on all ing countries to avoid the middle-income trap and
dimensions. Other countries that improved their posi- move towards inclusive and sustainable industrial
tions included the Republic of the Congo (which rose development.
22 places), Mongolia (21), the Islamic Republic of Iran Across countries, changes in industrial com-
(19), Cambodia (18) and Lithuania (18). petitiveness are indicative of new leaderships, poten-
tials and pitfalls as the world sees a renewed role for
Towards a sustainable industrial manufacturing—particularly, manufacturing driven
competitiveness by the new innovation and technology race—as key
The 2015 CIP Index ranking shows a global manufac- to securing inclusive and sustainable development
turing sector recovering in an environment shaken by (UNIDO 2017c).
191
Annexes
193
Annex A
Annexes to part A:
Demand for manufacturing
Annex A1 Country classification used for the estimation of income elasticities

and Engel curves
Table A1.1
Countries classified into global income groups
Global income groups

Country grouping Lowest income Low income Middle income Higher income
Least developed Congo (Democratic Afghanistan, Bangladesh, Bhutan, Cambodia,
countries Republic of), Burkina Faso, Chad, Djibouti, Lesotho, São Tomé
Madagascar Ethiopia, Gambia, Lao and Príncipe, Yemen
People’s Dem. Republic,
Malawi, Mali, Mauritania,
Mozambique, Nepal, Niger,
Rwanda, Sierra Leone,
Tanzania (United Republic
of), Timor-Leste, Uganda,
Zambia
Other developing Armenia, Cameroon, Albania, Azerbaijan, Bolivia Bosnia and Herzegovina,
economies Congo, Republic of, (Plurinational State of), Montenegro
Egypt, Kenya, Kyrgyzstan, Cabo Verde, Côte d’Ivoire,
Mongolia, Nigeria, Pakistan, El Salvador, Fiji, Gabon,
Philippines, Swaziland, Viet Ghana, Guatemala,
Nam Honduras, Iraq, Jamaica,
Jordan, Maldives, Moldova
(Republic of), Morocco,
Namibia, Papua New
Guinea, Peru, Sri Lanka,
Tajikistan
Emerging industrial India, Indonesia China, Kazakhstan, Belarus, Brazil, Bulgaria,
and industrialized Mauritius, Mexico, Colombia, Latvia, Lithuania,
economies Romania, Thailand, Ukraine Macedonia (Former
Yugoslav Republic of),
Russian Federation, Turkey,
Serbia, South Africa
Note: Classification criteria: At least 5 percent of the country’s richest population belong to one of the global income segments in Figure 2.2 (higher, middle, low, lowest). Industrialization level classification is based on
Annex C1, Table C1.2.
194
A
B
Annex A2 Median income elasticity and tendency of spending satiation across
Annex A
different income and economy groups
Figure A2.1
Differences in median income elasticities of selected manufacturing goods across economy groups
a. Least developed countries b. Other developing economies c. Emerging industrial and industrialized economies
Motor cars
Fuels and lubricants for

personal transport equipment
Furniture and
furnishings
Motor cycles
Jewellery, clocks
and watches
Small electric
household appliances
Carpets and other
floor coverings
Telephone and
telefax equipment
Newspapers, books
and stationery
Household textiles
Therapeutic appliances
and equipment
Shoes and other
footwear
Clothing material, other
articles of clothing and
clothing accessories
Low income
Pharmaceutical Middle income
products
Higher income
Bicycles
0 1 2 3 0 1 2 3 0 1 2 3
Elasticity (median elasticity) Elasticity (median elasticity) Elasticity (median elasticity)
Note: All values are for 2010. A product is classified as a necessity if the elasticity is between 0 and 1. Income, manufacturing consumption goods and industrialization level classifications are based on,
respectively, Annex A1, Table A1.1, Annex C4, Table C4.1 and Annex C1, Table C1.2.
195
B
A Figure A2.2
Tendency of spending satiation across different income and economic groups
Least developed countries Other developing economies

1.5 1.5

Annex A
1.0 1.0
0.5 0.5
0.0 0.0
Low income Middle income Higher income Low income Middle income Higher income
Emerging industrial and industrialized economies

Food 1.5
Manufacturinga
Services
1.0
0.5
0.0
Low income Middle income Higher income
a . Excludes food and non-alcoholic beverages; alcoholic beverages, tobacco and narcotics and other personal effects.
Note: All values are for 2010. R is the satiation rate. There is a tendency of satiation below the dotted line at R = 1. Income, manufacturing consumption goods and industrialization level classifications are based
on, respectively, Annex A1, Table A1.1, Annex C4, Table C4.1 and Annex C1, Table C1.2. Manufacturing consumption excludes food and non-alcoholic beverages, tobacco and narcotics and other personal
effects.
196
Table A3.1
Indicators used in volume, price and variety analysis
Active Change
Manu- Manu- product Change in in export
facturing facturing Change in Change in lines with average share of
GDP per income barter Export Extensive extensive Intensive intensive a revealed complexity Export the top
GDP per capita terms of terms of quantity marginc margins Number marginc margins comparative Complexity export share in unit value
capita growtha, tradea tradeb index relative to in trade, of active relative to in trade, advantage of export basket top unit segment
Country (constant 2003–2015 (index in (constant (constant the rest of 2003–2015 product the rest of 2003–2015 equal to or basketd (2003– value (2003–
group PPP$) (percent) 2010 $) 2010 $) 2010 PPP$) the world (percent) lines the world (percent) larger than 1 (percent) 2015) segment 2015)
Africa 8,646 47.0 168 126 129 0.78 0.07 2,302 0.0012 0.0002 387 –0.90 0.15 0.11 –0.02
Americas 12,360 52.3 122 119 106 0.78 0.08 2,232 0.0008 0.0001 324 –1.14 –0.01 0.11 –0.01
Asia and
Pacific 6,793 54.1 151 100 149 0.90 0.07 3,286 0.0073 0.0025 682 –0.51 0.23 0.16 0.01
Europe 9,230 80.7 231 104 229 0.79 0.13 2,054 0.0003 0.0001 455 –0.45 0.13 0.15 0.01
Africa 13,064 43.9 82 105 78 0.96 0.00 3,876 0.0044 0.0004 635 –0.31 –0.06 0.16 –0.04
Americas 17,511 52.8 98 117 84 0.97 0.00 3,813 0.0163 0.0013 534 0.07 0.10 0.12 0.04
Asia and
Pacific 13,757 106.8 171 88 199 0.99 0.01 4,437 0.1340 0.0705 2,020 –0.03 0.39 0.11 –0.02
Europe 21,253 70.5 151 104 148 0.98 0.02 4,024 0.0089 0.0036 1,171 –0.03 0.26 0.14 0.01
Americas 52,704 33.0 97 92 107 1.00 0.00 4,468 0.0741 –0.0141 1,381 0.47 0.01 0.19 0.01
Asia and
manufacturing exports by economy groups
Pacific 44,255 42.7 115 92 129 0.99 0.00 4,221 0.0314 –0.0138 953 0.41 0.16 0.25 0.03
Europe 43,363 38.9 137 97 143 1.00 0.00 4,348 0.0419 –0.0069 1,475 0.39 –0.04 0.30 –0.05
Africa 2,487 73.9 513 137 495 0.65 0.17 1,397 0.0006 0.0003 181 –1.25 –0.07 0.26 0.00
Asia and
Pacific 3,386 80.2 154 86 193 0.56 0.06 1,432 0.0028 0.0012 292 –1.81 0.14 0.04 –0.04
a . Values are in constant 2010 PPP$. b . Chained Fisher Index. c. Hummels and Klenow (2005). d. Hidalgo and Hausmann (2009).
Annex A3 Indicators used in the analysis of the purchasing power of
Note: GDP is gross domestic product and PPP is purchasing power parity. Regional and industrialization level classifications are based on, respectively, Annex C1, Tables C1.1 and C1.2.
Source: UNIDO elaboration based on World Development Indicators (World Bank 2017b) and BACI International Trade Database (Gaulier and Zignago 2010).
Annex A
197
A
B
Annex B
Annexes to part B: Trends in

industrial development indicators
Annex B1 Indicators of manufacturing value added and exports by

industrialization level, development group, region and income
Table B1.1
Manufacturing value added per capita, 2010–2015 (constant 2010 $)
Grouping 2010 2011 2012 2013 2014 2015

World 1,500.1 1,543.9 1,559.7 1,582.7 1,611.7 1,638.1
Industrialized economies 5,260.6 5,341.3 5,314.8 5,335.8 5,398.0 5,456.3
Developing and emerging industrial economies 702.0 744.5 775.9 806.2 835.4 862.1
Emerging industrial economies 970.9 1,036.4 1,087.7 1,135.0 1,179.0 1,224.6
Africa 184.4 185.6 189.0 193.5 200.1 201.1
Asia and Pacific 724.7 779.0 828.0 872.3 918.6 969.2
Europe 1,278.7 1,351.7 1,357.8 1,382.6 1,414.3 1,452.2
Latin America 1,222.1 1,263.7 1,257.7 1,264.1 1,240.5 1,176.3
By income
High income 5,054.5 5,135.3 5,109.2 5,126.9 5,186.9 5,243.8
Upper-middle income 1,323.0 1,413.9 1,484.8 1,550.7 1,611.5 1,667.1
Low income 72.2 75.7 78.7 82.8 86.6 90.4
198
Table B1.2
Manufactured exports per capita, 2010–2015 (current $) B
Grouping 2010 2011 2012 2013 2014 2015
World 1,735.1 2,057.6 2,079.6 2,139.9 2,179.7 2,003.0
Annex B
Africa 201.9 249.9 234.5 210.1 219.5 190.4
Asia and Pacific 637.4 777.2 830.5 883.4 920.5 870.4
Europe 1,876.6 2,329.2 2,347.1 2,421.0 2,472.9 2,152.0
Latin America 1,248.4 1,396.1 1,477.1 1,491.6 1,600.3 1,536.4
By income
High income 6,793.2 7,879.7 7,716.5 7,911.7 7,891.9 7,018.4
Low income 46.9 61.8 59.4 59.0 56.8 55.4
Source: UNIDO elaboration based on the United Nations Comtrade database (UNSD 2017) and the Manufacturing Value Added 2017 database (UNIDO 2017f).
Table B1.3
Impact of countries on world manufactures trade, 2010–2015 (percent)
Grouping 2010 2011 2012 2013 2014 2015

World 100.0 100.0 100.0 100.0 100.0 100.0
Industrialized economies 69.4 68.7 67.5 67.3 66.5 65.3
Emerging industrial economies 27.4 28.0 29.2 29.5 30.3 31.3
Africa 1.7 1.7 1.6 1.4 1.4 1.1
Asia and Pacific 20.0 20.6 21.6 22.3 23.1 24.6
Europe 3.9 4.1 4.1 4.1 4.1 4.0
Latin America 5.1 4.9 5.1 4.9 4.8 4.9
By income
High income 68.6 68.0 66.5 66.4 65.7 64.8
Upper-middle income 26.2 26.5 27.8 27.8 28.6 29.4
Low income 0.4 0.4 0.4 0.4 0.2 0.4
Note: Manufacturing exports is in current $. Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3.
199
B Table B1.4
Impact of countries on world manufacturing value added, 2010–2015 (percent)
Grouping 2010 2011 2012 2013 2014 2015

World 100.0 100.0 100.0 100.0 100.0 100.0
Annex B
Africa 1.8 1.8 1.9 1.9 2.0 2.0
Asia and Pacific 26.8 28.0 29.4 30.5 31.5 32.7
Europe 2.9 3.0 3.0 2.9 2.9 2.9
Latin America 7.0 7.0 6.9 6.9 6.6 6.2
By income
High income 62.6 61.4 60.1 59.0 58.2 57.5
Low income 0.6 0.6 0.6 0.6 0.6 0.7
Note: Manufacturing value added is in constant 2010 $. Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3.
Table B1.5
Medium-high and high-tech manufacturing value added share in total manufacturing, 2010–2015 (percent)
Grouping 2010 2011 2012 2013 2014 2015

World 43.9 44.3 44.5 44.3 44.5 44.7
Africa 19.2 19.2 19.6 18.8 18.5 19.2
Asia and Pacific 40.0 40.1 40.1 40.5 40.6 40.8
Europe 31.2 32.1 32.1 32.2 32.4 33.2
Latin America 30.2 30.4 30.0 30.3 30.0 29.2
By income
High income 47.9 48.5 48.9 48.7 49.1 49.3
Low income 8.3 7.9 7.6 7.3 7.0 6.7
Note: Manufacturing value added is in current $. Regional, industrialization, income level and technology classifications are based on, respectively, Annex C1, Tables C1.1, C1.2, C1.3 and Annex C3, Table C3.2.
Source: UNIDO elaboration based on the INDSTAT2 ISIC, Rev. 3. database (UNIDO 2017d) and the United Nations Comtrade database (UNSD 2017).
200
Table B1.6
Share of manufacturing value added in GDP, 2010–2015 (percent) B
Grouping 2010 2011 2012 2013 2014 2015
World 15.8 16.0 15.9 16.0 16.0 16.1
Annex B
Africa 9.9 10.1 10.0 10.3 10.5 10.5
Asia and Pacific 24.8 25.0 25.3 25.3 25.4 25.6
Europe 14.4 14.7 14.7 14.8 14.9 15.0
Latin America 13.8 13.8 13.5 13.4 13.1 12.8
By income
High income 13.9 14.0 13.8 13.8 13.7 13.7
Low income 12.3 12.5 12.5 12.6 12.7 12.9
Note: GDP is gross domestic product. Manufacturing value added and GDP is in constant 2010 $. Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables
C1.1, C1.2 and C1.3.
Table B1.7
Share of manufactured exports in total exports, 2010–2015 (percent)
Grouping 2010 2011 2012 2013 2014 2015

World 83.8 82.0 82.7 82.5 84.0 87.7
Africa 41.2 41.4 39.7 40.8 43.8 54.8
Asia and Pacific 80.9 78.1 80.1 81.7 83.9 89.3
Europe 91.4 91.3 91.0 90.3 90.9 91.3
Latin America 67.4 63.8 64.7 64.7 70.3 74.6
By income
High income 87.9 86.3 86.6 85.4 86.1 89.2
Low income 67.6 77.8 76.1 73.5 58.9 78.8
Note: Manufacturing exports is in current $. Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3.
201
B Annex B2 Summary of world trade by industrialization level, development group,
region and income
Table B2.1
Annex B
Total exports, 2010–2015 (current $, billions)
Grouping 2010 2011 2012 2013 2014 2015

World 13,658.5 16,432.2 16,386.7 17,095.1 16,950.5 14,656.5
Developing and emerging industrial economies 4,636.9 5,753.3 5,892.0 6,051.8 6,001.4 5,221.3
Emerging industrial economies 3,808.0 4,717.5 4,936.8 5,130.0 5,112.5 4,551.2
Africa 460.8 552.1 549.7 490.5 465.2 263.9
Asia and Pacific 2,834.5 3,554.8 3,661.5 3,854.9 3,917.3 3,547.3
Europe 483.0 601.9 609.9 636.2 647.3 562.9
Latin America 858.6 1,044.4 1,070.9 1,070.3 971.7 847.1
By income
High income 8,929.4 10,607.6 10,403.4 10,962.4 10,869.0 9,337.9
Lower-middle income 848.9 1,116.1 1,152.0 1,146.7 1,132.8 877.1
Low income 60.3 61.3 62.5 69.0 40.5 70.0
202
Table B2.2
Low-tech manufactured exports, 2010–2015 (current $, billions) B
Grouping 2010 2011 2012 2013 2014 2015
World 2,194.3 2,609.1 2,599.4 2,769.8 2,862.1 2,618.8
Annex B
Developing and emerging industrial economies 996.2 1,216.6 1,251.5 1,347.4 1,396.4 1,324.2
Africa 46.9 47.5 46.0 47.5 47.6 38.5
Asia and Pacific 679.4 845.8 883.3 955.0 989.8 961.5
Europe 119.8 142.8 145.4 162.8 172.7 155.1
Latin America 150.2 180.5 176.8 182.0 186.2 169.1
By income
High income 1,197.3 1,388.3 1,339.2 1,421.7 1,467.2 1,304.1
Upper-middle income 736.7 901.6 940.6 1,003.7 1,058.6 968.6
Low income 29.2 33.7 32.9 35.1 12.1 42.8
Note: Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3. Technology classification is based on Annex C3, Table C3.2.
Table B2.3
Medium-low tech manufactured exports, 2010–2015 (current $, billions)
Grouping 2010 2011 2012 2013 2014 2015

World 2,432.9 3,079.9 3,177.2 3,307.9 3,134.7 2,533.6
Developing and emerging industrial economies 785.8 975.4 1,008.6 977.6 983.2 823.3
Africa 90.9 119.6 112.1 89.9 89.7 56.8
Asia and Pacific 406.1 509.8 523.1 549.5 579.9 511.8
Europe 135.1 180.3 189.5 176.5 172.5 138.9
Latin America 153.7 165.7 183.9 161.7 141.0 115.9
By income
High income 1,581.8 2,024.6 2,064.0 2,219.7 2,045.3 1,646.9
Low income 9.3 11.5 11.9 12.4 9.9 9.3
Note: Regional, industrialization and income level classifications are based on, respectively, Annex C1, Tables C1.1, C1.2 and C1.3. Technology classification is based on Annex C3, Table C3.2.
203
B Table B2.4
Medium-high and high-tech manufactured exports share in total manufactured exports, 2010–2015 (percent)
Grouping 2010 2011 2012 2013 2014 2015

World 59.6 57.8 57.4 56.9 57.9 59.9
Annex B
Africa 27.4 26.9 27.6 31.4 32.6 34.2
Asia and Pacific 52.7 51.2 52.1 52.2 52.2 53.5
Europe 42.2 41.2 39.6 40.9 41.3 42.8
Latin America 47.5 48.0 47.9 50.4 52.1 54.9
By income
High income 64.6 62.7 62.2 61.1 62.5 64.6
Low income 5.5 5.1 5.8 6.4 8.2 5.7
Note: Manufacturing exports is in current $. Regional, industrialization, income level and technology classifications are based on, respectively, Annex C1, Tables C1.1, C1.2, C1.3 and Annex C3, Table C3.2.
204
Annex B3 Indicators of competitive industrial performance by country and
economy
B
Table B3.1
Annex B
Competitive industrial performance, 2010 and 2015
Medium- and
high‑tech
Medium-high manufactured Impact of
and high‑tech exports Impact of a a country
MVA share Share of MVA share in total Manufactured country world on world
Manufactured in total in GDP manufactured exports share MVA manufactures
MVA per capita exports per manufacturing (percent, exports in total exports (percent, trade
(constant capita (percent, constant (percent, (percent, constant (percent,
2010 $) (current $) current $) 2010 $) current $) current $) 2010 $) current $)
Country 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015
Afghanistan 70 67 3 3 9.48 9.51 12.18 10.32 0.00 0.05 19.63 16.48 0.02 0.02 0.00 0.00
Albania 249 273 402 422 6.56 6.69 6.06 5.98 15.42 9.07 75.26 63.33 0.01 0.01 0.01 0.01
Algeria 187 264 408 272 9.66 9.14 4.18 5.50 0.46 4.46 25.75 31.03 0.06 0.09 0.14 0.09
Angola 157 206 34 20 4.52 3.89 4.00 5.02 0.00 0.00 1.37 1.55 0.03 0.04 0.01 0.00
Argentina 1,780 1,859 867 602 26.00 26.00 15.78 15.00 45.02 46.13 52.42 46.04 0.71 0.67 0.33 0.22
Armenia 303 411 203 305 4.95 3.66 9.68 10.83 24.80 10.38 69.20 70.21 0.01 0.01 0.01 0.01
Australia 4,330 4,158 4,476 3,608 27.82 28.17 7.44 6.73 19.94 21.76 46.77 46.05 0.93 0.83 0.91 0.72
Austria 7,731 8,338 15,015 15,193 44.84 45.93 16.63 17.39 59.97 62.29 86.97 89.36 0.63 0.59 1.16 1.08
Azerbaijan 280 307 245 161 10.07 13.70 4.81 5.13 17.23 16.50 10.49 13.91 0.02 0.02 0.02 0.01
Bahamas 821 723 537 353 27.77 27.77 3.75 3.47 53.93 63.23 63.83 61.12 0.00 0.00 0.00 0.00
Bahrain 2,952 3,238 11,004 6,017 24.91 24.41 14.48 14.47 1.99 15.23 89.55 81.02 0.04 0.04 0.13 0.07
Bangladesh 122 182 121 152 9.14 9.47 16.05 18.76 2.14 2.03 95.43 95.65 0.18 0.24 0.17 0.18
Barbados 928 784 770 755 38.11 38.11 5.83 4.91 39.18 34.16 91.11 84.84 0.00 0.00 0.00 0.00
Belarus 1,398 1,497 2,362 2,372 39.98 37.99 24.02 24.30 39.17 38.76 88.68 84.50 0.13 0.12 0.21 0.19
Belgium 5,825 5,961 32,577 31,031 35.04 49.47 13.15 13.28 54.92 54.71 87.36 88.16 0.61 0.56 3.28 2.92
Belize 530 321 271 369 18.46 18.46 12.21 7.32 0.06 0.04 30.89 49.37 0.00 0.00 0.00 0.00
Bermuda 1,170 828 149 121 19.88 25.29 1.28 0.99 43.65 24.37 97.62 86.85 0.00 0.00 0.00 0.00
Bolivia, Plurinational
State of 223 258 279 236 11.59 11.67 11.27 10.79 3.28 3.41 39.80 29.06 0.02 0.02 0.03 0.02
Bosnia and
Herzegovina 487 527 910 1,076 16.14 17.55 10.88 10.94 23.00 24.87 72.69 80.39 0.02 0.02 0.03 0.03
Botswana 399 454 2,148 2,684 9.69 16.51 6.39 6.35 4.84 5.19 93.70 96.08 0.01 0.01 0.04 0.05
Brazil 1,415 1,203 669 540 36.63 35.16 12.71 10.79 36.30 41.46 67.30 58.77 2.71 2.08 1.22 0.94
Brunei Darussalam 5,195 4,560 1,307 1,013 3.32 3.32 14.91 14.15 82.80 82.59 4.08 6.75 0.02 0.02 0.00 0.00
Bulgaria 781 980 1,975 2,589 24.70 29.97 11.58 13.02 35.40 42.20 70.99 71.82 0.06 0.06 0.13 0.15
Burundi 22 22 2 4 3.08 2.57 10.24 8.88 23.95 21.72 15.73 37.39 0.00 0.00 0.00 0.00
Cabo Verde 184 195 56 71 27.10 27.10 5.43 5.57 0.00 0.13 59.26 55.20 0.00 0.00 0.00 0.00
Cambodia 115 172 254 513 0.26 0.26 14.69 16.87 7.94 8.92 65.17 93.57 0.02 0.02 0.03 0.07
Cameroon 172 184 62 46 7.61 7.61 15.01 14.08 11.45 14.81 32.80 26.25 0.03 0.04 0.01 0.01
Canada 4,747 4,840 6,594 6,771 30.40 30.57 10.06 9.75 55.72 59.11 62.14 64.77 1.56 1.45 2.07 2.03
Central African
Republic 80 53 6 4 9.25 9.25 17.41 17.87 8.29 0.63 31.07 86.12 0.00 0.00 0.00 0.00
Chile 1,383 1,481 1,962 1,865 25.85 13.67 10.79 10.08 11.74 11.28 46.96 52.83 0.23 0.22 0.31 0.28
China 1,432 2,048 1,132 1,601 41.38 41.38 31.95 32.15 60.52 58.80 96.25 96.57 18.51 23.46 13.98 18.35
205
B Table B3.1 (continued)
Medium- and
high‑tech
Annex B

Country 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015
Colombia 798 813 280 234 25.06 20.94 12.76 10.88 35.97 45.98 32.60 31.62 0.35 0.33 0.12 0.09
Congo, Republic of
the 107 137 594 560 2.42 2.42 3.55 4.25 83.42 93.80 34.91 38.53 0.00 0.01 0.02 0.02
Costa Rica 1,278 1,461 1,458 1,393 14.58 23.06 16.01 15.86 58.94 50.64 73.29 69.92 0.06 0.06 0.06 0.06
Côte d’Ivoire 168 153 185 93 14.99 14.99 13.59 10.22 32.54 22.01 36.16 20.28 0.03 0.03 0.03 0.02
Croatia 1,673 1,636 2,474 2,594 37.55 29.94 12.10 11.89 49.46 45.31 90.42 85.63 0.07 0.06 0.10 0.09
Cyprus 1,202 843 512 649 15.01 22.71 5.24 4.26 60.43 43.82 75.21 81.71 0.01 0.01 0.01 0.01
Czechia 4,187 5,049 11,443 13,930 45.00 50.51 21.25 23.97 67.94 68.96 90.99 93.43 0.42 0.44 1.11 1.22
Denmark 6,278 6,923 12,592 12,370 49.89 53.38 10.89 11.88 52.10 55.25 72.64 74.12 0.34 0.33 0.64 0.58
Ecuador 624 635 249 223 10.56 10.27 13.40 11.90 23.04 17.95 21.25 19.67 0.09 0.09 0.03 0.03
Egypt 421 437 200 164 23.84 14.20 16.07 16.29 25.88 32.79 62.37 68.30 0.33 0.33 0.15 0.12
El Salvador 667 746 640 834 19.13 19.13 18.80 19.25 15.48 13.28 85.96 93.18 0.04 0.04 0.04 0.04
Eritrea 26 30 0 0 6.06 7.58 5.83 5.82 14.67 14.67 34.57 34.57 0.00 0.00 0.00 0.00
Estonia 2,009 2,555 8,292 8,836 28.36 28.81 13.72 14.38 42.28 50.49 86.22 83.45 0.03 0.03 0.10 0.10
Ethiopia 12 20 3 4 10.92 16.08 3.90 4.48 31.91 32.76 9.84 8.54 0.01 0.02 0.00 0.00
Fiji 452 534 370 423 7.87 7.13 11.95 12.38 9.20 4.84 57.29 70.29 0.00 0.00 0.00 0.00
Finland 7,883 6,758 11,900 9,202 47.43 44.53 17.06 15.04 48.98 49.73 91.10 84.85 0.41 0.31 0.59 0.42
France 4,257 4,351 7,185 6,772 47.96 49.38 10.11 10.13 65.77 66.43 88.42 88.29 2.58 2.33 4.17 3.63
Gabon 400 472 648 648 5.39 5.39 4.79 4.86 10.09 10.09 18.23 18.23 0.01 0.01 0.01 0.01
Gambia 27 26 7 0 3.90 3.90 4.72 4.85 0.45 10.79 34.13 5.05 0.00 0.00 0.00 0.00
Georgia 289 428 240 284 17.16 15.71 10.57 11.60 48.98 39.73 73.88 69.33 0.01 0.01 0.01 0.01
Germany 8,479 9,430 13,719 14,625 59.57 61.40 19.94 20.63 72.34 74.11 86.81 88.83 6.57 6.33 10.16 9.83
Ghana 85 91 27 79 0.80 0.80 6.39 5.34 24.99 33.27 12.49 16.35 0.02 0.02 0.01 0.02
Greece 1,938 1,553 1,920 2,034 18.06 20.93 7.24 6.96 29.15 27.58 77.78 78.77 0.21 0.14 0.20 0.19
Guatemala 523 551 399 470 22.40 22.40 18.64 18.03 20.33 21.20 69.50 72.00 0.07 0.07 0.05 0.06
Haiti 59 73 6 6 5.26 5.26 8.83 9.92 3.80 3.80 82.97 82.97 0.01 0.01 0.00 0.00
Honduras 349 376 215 325 7.16 7.16 16.54 16.16 25.99 36.54 51.93 57.13 0.03 0.03 0.01 0.02
Hong Kong SAR,
China 560 505 1,160 749 38.07 36.06 1.71 1.39 53.74 38.85 54.84 41.77 0.04 0.03 0.07 0.05
Hungary 2,385 2,670 8,306 9,224 56.13 58.78 18.37 18.50 77.63 76.60 87.79 90.63 0.23 0.22 0.77 0.76
Iceland 5,382 6,217 4,165 3,727 16.57 16.57 12.93 13.63 43.72 36.72 28.78 26.00 0.02 0.02 0.01 0.01
India 228 298 152 168 39.21 37.91 16.83 16.90 28.24 33.89 85.16 83.27 2.71 3.25 1.73 1.83
Indonesia 687 830 392 393 40.33 35.08 21.99 21.64 29.05 28.63 60.09 67.39 1.60 1.78 0.87 0.84
Iran, Islamic Republic
of 746 708 379 342 45.68 39.79 11.84 12.01 23.91 31.69 33.55 19.69 0.53 0.47 0.26 0.20
Iraq 102 113 3 9 6.81 7.24 2.69 2.85 0.00 27.28 0.16 0.67 0.03 0.03 0.00 0.00
Ireland 9,648 12,753 23,488 25,010 60.54 61.02 20.25 19.65 53.84 55.85 91.65 94.05 0.43 0.50 1.00 0.98
206
Table B3.1 (continued)
Competitive industrial performance, 2010 and 2015 B
Medium- and
high‑tech
Annex B
Country 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015
Israel 4,371 4,164 7,574 7,628 61.97 42.81 13.86 12.27 55.79 57.25 96.21 96.02 0.31 0.28 0.52 0.51
Italy 5,068 4,840 6,870 6,838 42.70 42.73 14.18 14.10 53.93 54.93 91.62 92.21 2.91 2.41 3.77 3.41
Jamaica 373 361 421 380 18.77 18.77 7.74 7.39 5.51 0.87 92.58 87.55 0.01 0.01 0.01 0.01
Japan 8,404 8,496 5,539 4,485 55.64 55.34 19.45 18.92 79.75 79.85 91.62 90.84 10.31 8.95 6.49 4.73
Jordan 680 650 722 677 26.10 27.37 16.77 16.35 47.30 39.23 79.24 76.10 0.04 0.04 0.04 0.04
Kazakhstan 1,028 1,072 797 637 12.83 16.60 11.32 10.14 37.19 41.49 22.70 24.43 0.16 0.16 0.12 0.09
Kenya 112 119 63 59 8.52 13.07 11.26 10.46 24.93 21.62 48.85 48.66 0.04 0.05 0.02 0.02
Korea, Republic of 6,193 7,336 9,201 10,189 61.63 63.65 27.89 29.26 75.85 76.17 96.85 97.26 2.93 3.07 4.16 4.27
Kuwait 2,255 2,274 8,396 5,210 18.44 27.04 6.00 6.54 13.55 18.47 40.97 36.76 0.07 0.07 0.24 0.17
Kyrgyzstan 148 150 61 84 3.49 4.13 16.86 14.78 19.95 42.27 25.50 34.58 0.01 0.01 0.00 0.00
Latvia 1,366 1,539 3,423 4,714 23.26 21.52 12.03 10.67 35.18 41.60 80.85 80.83 0.03 0.03 0.07 0.08
Lebanon 674 703 708 447 19.95 19.95 7.61 9.73 46.81 37.61 72.22 75.69 0.03 0.03 0.03 0.02
Lithuania 2,008 2,803 5,707 7,536 30.00 23.14 16.89 18.20 37.83 40.76 85.63 85.37 0.06 0.07 0.16 0.18
Luxembourg 5,444 5,193 23,361 19,415 7.58 21.26 5.28 4.86 38.04 43.48 85.76 87.56 0.03 0.02 0.11 0.09
Macao SAR, China 291 496 243 38 4.05 6.31 0.55 0.88 0.00 2.23 43.47 9.78 0.00 0.00 0.00 0.00
Macedonia, Former
Yugoslav Republic of 450 629 1,451 2,002 19.50 15.35 9.87 12.36 31.42 58.88 89.28 92.65 0.01 0.01 0.03 0.03
Madagascar 55 55 32 39 3.56 3.56 13.32 13.49 4.26 5.25 72.03 44.31 0.01 0.01 0.01 0.01
Malawi 47 47 20 16 11.34 11.34 9.91 9.97 14.64 35.62 27.64 26.22 0.01 0.01 0.00 0.00
Malaysia 2,159 2,534 5,889 5,547 42.61 42.56 24.48 24.02 63.49 61.76 83.30 84.03 0.59 0.64 1.52 1.40
Maldives 279 264 66 78 2.63 2.63 3.97 2.96 0.03 2.54 29.46 19.59 0.00 0.00 0.00 0.00
Malta 2,410 2,242 8,392 5,347 19.18 19.18 11.36 9.09 56.16 62.98 93.04 86.75 0.01 0.01 0.03 0.02
Mauritius 1,176 1,292 1,141 1,260 2.67 8.86 15.10 14.26 2.93 4.01 95.59 93.74 0.01 0.01 0.01 0.01
Mexico 1,467 1,593 2,014 2,612 36.92 39.76 16.57 16.73 78.71 80.07 80.09 87.16 1.68 1.68 2.20 2.76
Moldova, Republic of 151 190 141 198 8.35 18.76 10.60 11.03 13.09 30.78 61.57 61.79 0.01 0.01 0.01 0.01
Mongolia 181 217 458 927 2.05 6.66 6.81 5.51 1.91 0.31 62.93 59.91 0.00 0.01 0.01 0.02
Montenegro 303 310 307 353 16.26 16.06 4.55 4.29 31.85 23.58 46.71 62.62 0.00 0.00 0.00 0.00
Morocco 453 474 430 512 28.07 27.75 15.59 14.40 38.26 51.25 77.64 79.84 0.14 0.14 0.13 0.15
Mozambique 44 43 7 25 10.89 10.89 10.47 8.48 9.28 16.76 7.84 21.94 0.01 0.01 0.00 0.01
Myanmar 159 242 57 57 11.65 6.63 19.86 21.97 0.50 0.50 38.53 38.53 0.08 0.11 0.03 0.03
Namibia 642 603 1,430 1,759 7.45 7.35 12.49 10.29 14.34 34.19 53.63 70.65 0.01 0.01 0.03 0.03
Nepal 36 41 25 18 8.47 8.60 5.95 5.83 20.06 17.87 76.73 76.85 0.01 0.01 0.01 0.00
Netherlands 5,337 5,508 21,909 23,069 47.73 48.19 10.62 10.82 55.01 56.27 73.97 82.40 0.86 0.78 3.36 3.25
New Zealand 3,636 3,711 3,152 3,395 17.61 17.25 10.81 10.02 21.34 19.65 46.36 46.83 0.15 0.14 0.13 0.13
Niger 17 24 20 35 22.70 22.70 4.76 6.30 12.86 8.65 67.44 87.36 0.00 0.00 0.00 0.01
Nigeria 149 254 113 91 33.44 33.44 6.45 10.00 7.47 18.99 20.82 15.71 0.23 0.39 0.17 0.12
207
B Table B3.1 (continued)
Medium- and
high‑tech
Annex B

Country 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015
Norway 6,304 6,651 7,236 6,218 58.13 46.06 7.19 7.42 52.21 53.29 27.09 30.92 0.30 0.29 0.33 0.27
Oman 2,107 1,533 1,747 1,901 19.39 19.92 10.58 10.03 42.71 38.28 16.27 26.74 0.06 0.06 0.05 0.07
Pakistan 134 146 102 94 24.62 24.62 13.04 12.96 9.95 9.39 82.40 81.31 0.22 0.23 0.16 0.15
Panama 574 632 64 71 6.39 6.19 7.19 5.88 15.00 9.11 32.66 40.02 0.02 0.02 0.00 0.00
Papua New Guinea 81 104 345 325 12.61 12.61 5.68 5.64 9.06 8.06 43.86 51.40 0.01 0.01 0.02 0.02
Paraguay 361 412 152 236 21.92 21.92 11.18 10.77 13.18 21.54 14.47 18.83 0.02 0.02 0.01 0.01
Peru 780 843 614 564 15.48 14.72 15.59 14.21 5.25 7.08 50.39 53.20 0.22 0.22 0.17 0.15
Philippines 460 594 356 545 45.71 45.95 21.40 22.42 73.13 75.87 64.25 93.54 0.41 0.50 0.30 0.46
Poland 1,933 2,481 3,576 4,445 39.27 35.45 15.57 17.27 58.14 56.10 87.83 88.26 0.72 0.80 1.27 1.43
Portugal 2,605 2,588 4,287 4,950 26.43 25.74 11.59 11.79 39.59 39.35 91.84 92.72 0.27 0.22 0.42 0.43
Qatar 6,354 7,007 3,994 3,364 22.75 66.87 8.97 8.93 20.17 33.32 9.67 9.64 0.11 0.13 0.06 0.06
Romania 1,764 1,909 2,200 2,697 40.15 37.85 21.32 19.66 54.69 58.20 90.36 86.83 0.35 0.31 0.41 0.44
Russian Federation 1,362 1,437 983 1,091 25.04 25.60 12.83 12.81 24.02 27.96 35.45 45.51 1.88 1.72 1.30 1.30
Rwanda 30 34 9 18 6.66 6.66 5.45 4.94 7.62 14.71 46.78 50.21 0.00 0.00 0.00 0.00
Saint Lucia 216 188 245 319 7.83 7.83 3.08 2.75 30.00 37.55 61.64 80.07 0.00 0.00 0.00 0.00
Saudi Arabia 2,071 2,462 1,893 1,887 32.19 35.41 11.04 11.56 35.56 37.15 21.65 30.70 0.56 0.65 0.49 0.50
Senegal 121 121 119 105 20.80 21.65 12.08 11.56 14.05 15.07 71.42 60.55 0.02 0.02 0.01 0.01
Serbia 594 644 846 1,258 18.64 23.91 13.64 14.18 32.82 46.54 78.21 83.23 0.05 0.05 0.07 0.09
Singapore 9,392 9,537 32,222 27,476 84.79 80.38 20.21 18.78 68.99 71.11 89.76 91.86 0.46 0.44 1.51 1.28
Slovakia 3,128 3,866 11,103 13,105 46.61 48.19 18.95 20.90 66.26 70.66 93.80 94.75 0.16 0.17 0.55 0.59
Slovenia 4,109 4,367 10,814 11,632 48.35 48.65 17.56 18.41 62.96 62.84 90.83 90.46 0.08 0.08 0.20 0.20
South Africa 949 952 1,134 877 25.16 24.43 13.07 12.46 45.64 49.09 70.84 68.59 0.47 0.43 0.54 0.40
Spain 3,734 3,480 4,425 5,005 37.81 40.24 12.17 11.34 57.40 57.30 83.74 83.00 1.68 1.34 1.90 1.92
Sri Lanka 442 598 288 376 11.79 6.68 18.00 18.00 9.48 9.21 70.10 76.38 0.09 0.10 0.05 0.06
State of Palestine 291 291 91 172 5.32 2.20 13.28 12.20 8.28 12.27 90.29 83.74 0.01 0.01 0.00 0.01
Suriname 1,769 1,268 623 530 11.62 11.62 20.98 13.91 9.38 12.37 15.93 15.44 0.01 0.01 0.00 0.00
Swaziland 1,387 1,441 889 889 1.05 1.65 36.39 35.91 28.96 28.96 92.86 92.86 0.02 0.02 0.01 0.01
Sweden 8,507 8,568 15,145 12,743 45.04 48.92 16.36 15.56 57.69 59.88 89.70 88.93 0.77 0.70 1.31 1.04
Switzerland 13,664 14,404 22,317 24,652 61.35 63.04 18.42 19.11 69.50 71.15 89.34 70.07 1.03 1.00 1.61 1.70
Syrian Arab Republic 141 56 240 240 21.52 21.52 4.82 3.19 22.69 22.69 43.87 43.87 0.03 0.01 0.05 0.05
Taiwan Province of
China 4,836 4,644 10,789 11,529 67.91 70.80 26.08 22.94 72.40 73.65 96.01 96.26 1.08 0.90 2.31 2.25
Tajikistan 110 49 15 15 3.65 2.49 14.74 5.49 66.30 66.30 13.82 13.82 0.01 0.00 0.00 0.00
Tanzania, United
Republic of 47 55 42 47 12.00 6.83 6.89 6.78 13.58 20.22 48.54 43.18 0.02 0.02 0.02 0.02
Thailand 1,589 1,657 2,458 2,755 43.84 40.71 31.09 28.60 61.82 62.65 83.93 88.78 1.02 0.94 1.51 1.56
Tonga 218 233 17 16 1.61 1.61 6.06 6.24 20.81 23.45 21.19 46.28 0.00 0.00 0.00 0.00
208
Table B3.1 (continued)
Competitive industrial performance, 2010 and 2015 B
Medium- and
high‑tech
Annex B
Country 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015 2010 2015
Trinidad and Tobago 3,163 2,739 5,564 5,564 39.60 39.60 19.97 17.22 17.70 17.70 73.95 73.95 0.04 0.03 0.07 0.07
Tunisia 684 683 1,275 1,125 20.01 20.01 16.53 16.22 45.02 47.37 82.59 89.97 0.07 0.06 0.12 0.11
Turkey 1,577 1,814 1,381 1,549 32.32 29.86 15.60 15.76 42.50 41.79 87.71 84.71 1.10 1.19 0.92 1.01
Uganda 56 55 12 16 11.07 11.07 9.45 8.67 15.16 17.08 34.83 36.02 0.02 0.02 0.00 0.01
Ukraine 405 342 964 609 32.74 30.36 13.12 12.27 43.25 37.56 85.57 71.59 0.18 0.13 0.41 0.23
United Arab Emirates 3,091 3,572 1,854 3,630 12.61 12.61 9.00 8.93 27.07 19.58 10.45 12.17 0.25 0.27 0.14 0.28
United Kingdom 3,556 3,509 5,174 5,541 49.74 47.37 9.29 8.53 63.23 68.99 76.89 76.90 2.15 1.89 2.99 2.99
United States 5,906 6,073 2,783 3,000 47.69 41.17 12.20 11.75 64.75 65.29 76.84 75.05 17.64 16.27 7.94 8.04
Uruguay 1,615 1,653 795 926 13.80 15.29 13.53 11.80 23.92 26.26 39.91 41.44 0.05 0.05 0.02 0.03
Venezuela, Bolivarian
Republic of 1,755 1,562 752 427 34.28 34.28 12.92 12.31 8.11 9.65 32.55 14.70 0.49 0.40 0.20 0.10
Viet Nam 236 337 567 1,469 25.43 40.36 17.94 20.34 27.99 49.25 69.30 84.74 0.20 0.26 0.46 1.14
Yemen 111 66 25 5 2.37 2.06 8.45 8.64 6.12 35.48 9.45 33.55 0.03 0.01 0.01 0.00
Zambia 115 126 101 67 21.08 21.08 7.90 7.66 14.33 30.00 19.55 15.47 0.02 0.02 0.01 0.01
Note: All values for world manufacturing value added (MVA) are in constant 2010 $, and values for world manufactures trade are in current $. GDP is gross domestic product. Technology classification is
based on Annex C3, Tables C3.1 and C3.2.
209
Annex C
General annexes
Annex C1 Country and economy groups
Table C1.1
Countries and economies by region
AFRICA
Central Africa
Cameroon Chad Equatorial Guinea São Tomé and Principe
Central African Congo, Republic of the Gabon
Republic
Eastern Africa
Burundi Djibouti Ethiopia Réunion Somalia
Comoros Eritrea Kenya Rwanda Uganda
North Africa
Algeria Libya South Sudan Tunisia
Egypt Morocco Sudan
Southern Africa
Angola Lesotho Mauritius Seychelles Tanzania, United
Republic of
Botswana Madagascar Mozambique South Africa Zambia
Congo, Dem. Republic Malawi Namibia Swaziland Zimbabwe
of the
Western Africa
Benin Gambia Liberia Nigeria
Burkina Faso Ghana Mali Senegal
Cabo Verde Guinea Mauritania Sierra Leone
Côte d'Ivoire Guinea-Bissau Niger Togo
AMERICAS
Latin America
Caribbean
Anguilla British Virgin Islands Dominican Republic Martinique Saint Vincent and the
Grenadines
Antigua and Barbuda Cayman Islands Grenada Montserrat Trinidad and Tobago
Aruba Cuba Guadeloupe Puerto Rico United States Virgin
Islands
Bahamas Curaçao Haiti Saint Kitts and Nevis
Barbados Dominica Jamaica Saint Lucia
Central America
Belize El Salvador Honduras Nicaragua
Costa Rica Guatemala Mexico Panama
South America
Argentina Chile French Guiana Peru Venezuela, Bolivarian
Republic of
Bolivia, Plurinational Colombia Guyana Suriname
State of
Brazil Ecuador Paraguay Uruguay
210
Table C1.1 (continued)
Countries and economies by region C
North America
North America
Annex C
Bermuda Canada Greenland United States
ASIA AND PACIFIC
Central Asia
Kazakhstan Mongolia Turkmenistan
Kyrgyzstan Tajikistan Uzbekistan
East Asia
China Korea, Republic of Macao SAR, China Singapore
Hong Kong SAR, Japan Malaysia Taiwan Province of
China China
South Asia
Afghanistan Bhutan Maldives Pakistan
Bangladesh India Nepal Sri Lanka
South East Asia
Brunei Darussalam Indonesia Myanmar Thailand
Cambodia Lao People’s Dem. Philippines Viet Nam
Republic
West Asia
Armenia Iraq Lebanon State of Palestine
Azerbaijan Israel Oman Syrian Arab Republic
Bahrain Jordan Qatar United Arab Emirates
Iran, Islamic Republic of Kuwait Saudi Arabia Yemen
Other Asia and Pacific
American Samoa French Polynesia Marshall Islands Palau Tonga
Australia Guam Micronesia, Federated Papua New Guinea Tuvalu
States of
Cook Islands Kiribati New Caledonia Solomon Islands Vanuatu
Fiji Korea, Dem. People’s New Zealand Timor-Leste
Republic of
EUROPE
European Uniona
Austria Finland Italy Portugal United Kingdom
Belgium France Lithuania Slovakia
Czechia Germany Luxembourg Slovenia
Denmark Hungary Malta Spain
Estonia Ireland Netherlands Sweden
Other European
Albania Croatia Latvia Montenegro San Marino
Andorra Cyprus Liechtenstein Norway Serbia
Belarus Georgia Macedonia, Former Poland Switzerland
Yugoslav Republic of
Bosnia and Greece Moldova, Republic of Romania Turkey
Herzegovina
Bulgaria Iceland Monaco Russian Federation Ukraine
a . Excluding non-industrialized EU economies.
Source: UNIDO elaboration based on UNIDO (2017e).
211
C Table C1.2
Countries and economies by industrialization level
INDUSTRIALIZED ECONOMIES
Aruba Denmark Ireland Monaco Slovenia
Annex C
Andorra Estonia Israel Netherlands Spain

Australia Finland Italy New Caledonia Sweden
Austria France Japan New Zealand Switzerland
Bahrain French Guiana Korea, Republic of Norway Taiwan Province of
China
Belgium French Polynesia Kuwait Portugal United Arab Emirates
Bermuda Germany Liechtenstein Puerto Rico United Kingdom
British Virgin Islands Greenland Lithuania Qatar United States
Canada Guam Luxembourg Russian Federation United States Virgin
Islands
Cayman Islands Hong Kong SAR, Macao SAR, China San Marino
China
Curaçao Hungary Malaysia Singapore
Czechia Iceland Malta Slovakia
DEVELOPING AND EMERGING INDUSTRIAL ECONOMIES
Argentina Colombia Kazakhstan Romania Turkey
Belarus Costa Rica Latvia Saudi Arabia Ukraine
Brazil Croatia Macedonia, Former Serbia Uruguay
Yugoslav Republic of
Brunei Darussalam Cyprus Mauritius South Africa Venezuela, Bolivarian
Republic of
Bulgaria Greece Mexico Suriname
Chile India Oman Thailand
China Indonesia Poland Tunisia
Albania Cook Islands Guyana Mongolia Saint Lucia
Algeria Côte d'Ivoire Honduras Montenegro Saint Vincent and the
Grenadines
Angola Cuba Iran, Islamic Republic of Montserrat Seychelles
Anguilla Dominica Iraq Morocco Sri Lanka
Antigua and Barbuda Dominican Republic Jamaica Namibia State of Palestine
Armenia Ecuador Jordan Nicaragua Swaziland
Azerbaijan Egypt Kenya Nigeria Syrian Arab Republic
Bahamas El Salvador Korea, Dem. People’s Pakistan Tajikistan
Republic of
Barbados Equatorial Guinea Kyrgyzstan Palau Tonga
Belize Fiji Lebanon Panama Trinidad and Tobago
Bolivia, Plurinational Gabon Libya Papua New Guinea Turkmenistan
State of
Bosnia and Georgia Maldives Paraguay Uzbekistan
Herzegovina
Botswana Ghana Marshall Islands Peru Viet Nam
Cabo Verde Grenada Martinique Philippines Zimbabwe
Cameroon Guadeloupe Micronesia, Federated Réunion
States of
Congo, Republic of the Guatemala Moldova, Republic of Saint Kitts and Nevis
212
Table C1.2 (continued)
Countries and economies by industrialization level C
Afghanistan Congo, Dem. Republic Lesotho Rwanda Timor-Leste
Annex C
of the
Bangladesh Djibouti Liberia Samoa Togo
Benin Eritrea Madagascar São Tomé and Principe Tuvalu
Bhutan Ethiopia Malawi Senegal Uganda
Burkina Faso Gambia Mali Sierra Leone Vanuatu
Burundi Guinea Mauritania Solomon Islands Yemen
Cambodia Guinea-Bissau Mozambique Somalia Zambia
Central African Haiti Myanmar South Sudan
Republic
Chad Kiribati Nepal Sudan
Comoros Lao People’s Dem. Niger Tanzania, United
Republic Republic of
Note: Industrialized economies include economies with adjusted manufacturing value added (MVA) per capita higher than 2,500 or a gross domestic product higher than 20,000 international PPP$ (PPP is
purchasing power parity). Emerging industrial economies include economies with adjusted MVA per capita ranging between 1,000 and 2,500 or whose share of the world MVA is higher than 0.5 percent.
The list of least developed countries is based on decisions of the United Nations General Assembly. All remaining economies are included in the group “other developing economies.”
Table C1.3
Countries and economies by income level
HIGH INCOME
Andorra Chile Guam Malta Saudi Arabia
Anguilla Croatia Hong Kong SAR, Monaco Singapore
China
Antigua and Barbuda Curaçao Iceland Netherlands Slovakia
Aruba Cyprus Ireland New Caledonia Slovenia
Australia Czechia Israel New Zealand Spain
Austria Denmark Italy Norway Sweden
Bahamas Equatorial Guinea Japan Oman Switzerland
Bahrain Estonia Korea, Republic of Poland Taiwan Province of
China
Barbados Finland Kuwait Portugal Trinidad and Tobago
Belgium France Latvia Puerto Rico United Arab Emirates
Bermuda French Polynesia Liechtenstein Qatar United Kingdom
Brunei Darussalam Germany Lithuania Russian Federation United States
Canada Greece Luxembourg Saint Kitts and Nevis United States Virgin
Islands
Cayman Islands Greenland Macao SAR, China San Marino Uruguay
213
C Table C1.3 (continued)
Countries and economies by income level
UPPER MIDDLE INCOME

Albania China Iraq Montenegro Thailand
Annex C
Algeria Colombia Jamaica Namibia Tonga

American Samoa Costa Rica Jordan Palau Tunisia
Angola Cuba Kazakhstan Panama Turkey
Argentina Dominica Lebanon Peru Turkmenistan
Azerbaijan Dominican Republic Libya Romania Tuvalu
Belarus Ecuador Macedonia, Former Saint Lucia Venezuela, Bolivarian
Yugoslav Republic of Republic of
Belize Fiji Malaysia Saint Vincent and the
Grenadines
Bosnia and Gabon Maldives Serbia
Herzegovina
Botswana Grenada Marshall Islands Seychelles
Brazil Hungary Mauritius South Africa
Bulgaria Iran, Islamic Republic of Mexico Suriname
LOWER MIDDLE INCOME
American Samoa El Salvador Lao People’s Dem. Papua New Guinea Swaziland
Republic
Armenia Georgia Lesotho Philippines Syrian Arab Republic
Bhutan Ghana Mauritania Paraguay Timor-Leste
Bolivia, Plurinational Guatemala Micronesia, Federated São Tomé and Principe Ukraine
State of States of
Cabo Verde Guyana Moldova, Republic of Senegal Uzbekistan
Cameroon Honduras Mongolia Solomon Islands Vanuatu
Congo, Republic of the India Morocco South Sudan Viet Nam
Côte d'Ivoire Indonesia Nicaragua Sri Lanka Yemen
Djibouti Kiribati Nigeria State of Palestine Zambia
Egypt Kyrgyzstan Pakistan Sudan
LOW INCOME
Afghanistan Chad Guinea-Bissau Mali Somalia
Bangladesh Comoros Haiti Mozambique Tajikistan
Benin Congo, Dem. Republic Kenya Myanmar Tanzania, United
of the Republic of
Burkina Faso Eritrea Korea, Dem. People’s Nepal Togo
Republic of
Burundi Ethiopia Liberia Niger Uganda
Cambodia Gambia Madagascar Rwanda Zimbabwe
Central African Guinea Malawi Sierra Leone
Republic
214
Annex C2 Classification of manufacturing sectors in various sources C
Table C2.1
Classification of manufacturing sectors, ISIC Rev.3
Annex C
ISIC code rev. 3 Description
15 Manufacture of food products and beverages
16 Manufacture of tobacco products
17 Manufacture of textiles
18 Manufacture of wearing apparel; dressing and dyeing of fur
19 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear
20 Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw
and plaiting materials
21 Manufacture of paper and paper products
22 Publishing, printing and reproduction of recorded media
23 Manufacture of coke, refined petroleum products and nuclear fuel
24 Manufacture of chemicals and chemical products
25 Manufacture of rubber and plastics products
26 Manufacture of other non-metallic mineral products
27 Manufacture of basic metals
28 Manufacture of fabricated metal products, except machinery and equipment
29 Manufacture of machinery and equipment n.e.c.
30 Manufacture of office, accounting and computing machinery
31 Manufacture of electrical machinery and apparatus n.e.c.
32 Manufacture of radio, television and communication equipment and apparatus
33 Manufacture of medical, precision and optical instruments, watches and clocks
34 Manufacture of motor vehicles, trailers and semi-trailers
35 Manufacture of other transport equipment
36 Manufacture of furniture; manufacturing n.e.c.
37 Recycling
Note: ISIC is International Standard Industrial Classification; n.e.c. is not elsewhere classified.
Source: UNIDO elaboration based on UNSD (n.d. a)
215
C Table C2.2
Classification of manufacturing sectors, Eora Multi-Regional Input-Output Database
Correspondence for
Annex C
01t02 Agriculture, hunting and forestry

05 Fishing
10t14 Mining and quarrying
15t37 Manufacturing
15t16 Food and beverages
17t19 Textiles and wearing apparel
20t22 Wood and paper
23t26 Petroleum, chemical and non-metallic mineral products
27t28 Metal products
29t33 Electrical and machinery
34t35 Transport equipment
36 Other manufacturing
37 Recycling
40t41 Electricity, gas and water
45 Construction
50 Maintenance and repair
51 Wholesale trade
52 Retail trade
55 Hotels and restaurants
60t63 Transport
64 Post and telecommunications
65t74 Financial intermediation and business activities
75 Public administration
80t93 Education, health and other services
95 Private households
99 Others
Note: ISIC is International Standard Industrial Classification. Correspondence for ISIC Rev. 3 is based on Lenzen et al. (2013).
Source: UNIDO elaboration based on Lenzen et al. (2012).
216
Table C2.3
Classification of manufacturing sectors, OECD Inter-Country Input-Output Database, 2016 edition C
Correspondence for
Annex C
01t02, 05 Agriculture, hunting, forestry and fishing
10t14 Mining and quarrying
15t37 Manufacturing
15t16 Food products, beverages and tobacco
17t19 Textiles, textile products, leather and footwear
20 Wood and products of wood and cork
21t22 Pulp, paper, paper products, printing and publishing
23 Coke, refined petroleum products and nuclear fuel
24 Chemicals and chemical products
25 Rubber and plastics products
26 Other non-metallic mineral products
27 Basic metals
28 Fabricated metal products
29 Machinery and equipment, n.e.c .
30, 32t33 Computer, Electronic and optical equipment
31 Electrical machinery and apparatus, n.e.c.
34 Motor vehicles, trailers and semi-trailers
35 Other transport equipment
36t37 Manufacturing n.e.c.; recycling
40t41 Electricity, gas and water supply
45 Construction
50t52 Wholesale and retail trade; repairs
55 Hotels and restaurants
60t63 Transport and storage
64 Post and telecommunications
65t67 Financial intermediation
70 Real estate activities
71 Renting of machinery and equipment
72 Computer and related activities
73t74 Research and development and other business activities
75 Public admininstration and defence; compulsory social security
80 Education
85 Health and social work
90t93 Other community, social and personal services
95 Private households with employed persons
Note: ISIC is International Standard Industrial Classification; n.e.c. is not elsewhere classified. Correspondence for ISIC Rev. 3 is based on OECD (2017c).
Source: UNIDO elaboration based on OECD (2017c).
217
C Annex C3 Classification of manufacturing sectors by technology group
Table C3.1
Technology classification of medium- and high-tech manufacturing exports
Annex C
Standard International Trade Classification Rev. 3 codes of medium- and high-tech exports
266t267
512t513, 525, 533, 541t542, 553t554, 562, 571t575, 579, 581t583, 591, 593, 597, 598
653, 671t672, 678
711t714, 716, 718, 721t728, 731, 733, 735, 737, 741t749, 751t752, 759, 761t764, 771t776, 778, 781t786, 791t793
811t813, 871t874, 881t882, 884t885, 891
Source: UNIDO elaboration based on UNIDO (2017c).
218
Table C3.2
Technology classification of manufacturing sectors C
International Standard
Industrial Classification Rev. 3 Description Technology group
Annex C
2423 Manufacture of pharmaceuticals, medicinal chemicals and High-tech
botanical products
30 Manufacture of office, accounting and computing machinery High-tech
32 Manufacture of radio, television and communication equipment High-tech
and apparatus
33 Manufacture of medical, precision and optical instruments, High-tech
watches and clocks
353 Manufacture of aircraft and spacecraft High-tech
24 excl. 2423 Manufacture of chemicals and chemical products (excluding Medium-high-tech
pharmaceuticals, medicinal chemicals and botanical products)
29 Manufacture of machinery and equipment n.e.c. Medium-high-tech
31 Manufacture of electrical machinery and apparatus n.e.c. Medium-high-tech
34 Manufacture of motor vehicles, trailers and semi-trailers Medium-high-tech
352 Manufacture of railway and tramway locomotives and rolling stock Medium-high-tech
359 Manufacture of transport equipment n.e.c. Medium-high-tech
23 Manufacture of coke, refined petroleum products and nuclear fuel Medium-low-tech
25 Manufacture of rubber and plastics products Medium-low-tech
26 Manufacture of other non-metallic mineral products Medium-low-tech
27 Manufacture of basic metals Medium-low-tech
28 Manufacture of fabricated metal products, except machinery and Medium-low-tech
equipment
351 Building and repairing of ships and boats Medium-low-tech
15 Manufacture of food products and beverages Low-tech
16 Manufacture of tobacco products Low-tech
17 Manufacture of textiles Low-tech
18 Manufacture of wearing apparel; dressing and dyeing of fur Low-tech
19 Tanning and dressing of leather; manufacture of luggage, Low-tech
handbags, saddlery, harness and footwear
20 Manufacture of wood and of products of wood and cork, except Low-tech
furniture; manufacture of articles of straw and plaiting materials
21 Manufacture of paper and paper products Low-tech
22 Publishing, printing and reproduction of recorded media Low-tech
36 Manufacture of furniture; manufacturing n.e.c. Low-tech
37 Recycling Low-tech
Note: N.e.c. is not elsewhere classified.
Source: OECD (2011b).
219
C Annex C4 Classification of manufacturing consumption goods
Table C4.1
Classification of individual consumption of manufacturing goods
Annex C
Description Consumption goods

Food and non-alcoholic beverages 1.1 Food; 1.2 Non-alcoholic beverages.
Alcoholic beverages, tobacco and 2.1 Alcoholic beverages; 2.2 Tobacco; 2.3 Narcotics.
narcotics
Clothing and footwear 3.1.1 Clothing materials; 3.1.2 Garments; 3.1.3 Other articles of clothing and clothing
accessories; 3.2.1 Shoes and other footwear.
Furnishings, household equipment 5.1.1 Furniture and furnishings; 5.1.2 Carpets and other floor coverings; 5.2 Household
and routine household maintenance textiles; 5.3.1 Major household appliances whether electric or not; 5.3.2 Small electric
household appliances; 5.4 Glassware, tableware and household utensils; 5.5 Tools
and equipment for house and garden; 5.6.1 Non-durable household goods.
Health 6.1 Medical products, appliances and equipment (6.1.1 Pharmaceutical products; 6.1.2
Other medical products; 6.1.2 Therapeutic appliances and equipment (includes the
repair of such articles (S)).
Transport 7.1 Purchase of vehicles (7.1.1 Motor cars; 7.1.2 Motorcycles; 7.1.3 Bicycles; 7.1.4
Animal drawn vehicles); 7.2.2 Fuels and lubricants for personal transport equipment .
Communication 8.2 Telephone and telefax equipment (includes repair of such equipment (S)).
Recreation and culture 9.1 Audio-visual, photographic and information processing equipment (excludes repair
of such equipment (S)); 9.2.1 Major durables for outdoor recreation; 9.2.2 Musical
instruments and major durables for indoor recreation; 9.3 Other recreational items and
equipment, gardens and pets (excludes Veterinary and other services for pets (S)); 9.5
Newspapers, books and stationery.
Miscellaneous goods and services 12.1.3 Other appliances, articles and products for personal care; 12.3.1 Jewellery,
clocks and watches (includes repair of such articles (S)); 12.3.2 Other personal effects
(includes repair of such articles (S)).
Note: Items denoted by the letter (S) are services. Codes in the column Consumption goods correspond to Classification of Individual Consumption According to Purpose.
Source: UNIDO elaboration based on UNSD (n.d. b) and Duarte (2017).
220
Annex C5 Classification of manufacturing sectors by final use of their products C
Table C5.1
Sectors producing consumer, intermediate, other investment and high-tech products
Annex C
Category ISIC code, rev. 3 Description
Final consumption 15 Manufacture of food products and beverages
goods
16 Manufacture of tobacco products
17 Manufacture of textiles
18 Manufacture of wearing apparel; dressing and dyeing of fur
19 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness
and footwear
34 Manufacture of motor vehicles, trailers and semi-trailers
36 Manufacture of furniture; manufacturing n.e.c.
37 Recycling
Intermediate 20 Manufacture of wood and of products of wood and cork, except furniture; manufacture
goods of articles of straw and plaiting materials
21 Manufacture of paper and paper products
22 Publishing, printing and reproduction of recorded media
23 Manufacture of coke, refined petroleum products and nuclear fuel
24 Manufacture of chemicals and chemical products
25 Manufacture of rubber and plastics products
26 Manufacture of other non-metallic mineral products
27 Manufacture of basic metals
28 Manufacture of fabricated metal products, except machinery and equipment
Other investment 35 Manufacture of other transport equipment
goods
29 Manufacture of machinery and equipment n.e.c.
Electronics- 30 Manufacture of office, accounting and computing machinery
related high-tech
investment goods 31 Manufacture of electrical machinery and apparatus n.e.c.
32 Manufacture of radio, television and communication equipment and apparatus
33 Manufacture of medical, precision and optical instruments, watches and clocks
Note: Sector classification based on ISIC Rev. 3, UNSD (n.d. a). The products of some sectors can fall in more than one category. This classification indicates the most extended uses but not necessarily the
only ones.
Source: Lewis and Peng (2017).
221
Annex D
Data appendix
Annex D1 Data guide
Table D1.1
Figures, tables and datasets based on background papers prepared for Industrial Development Report
(IDR) 2018
Datasets used to produce the background papers Corresponding figures

Reference (not necessarily for the figures and tables of IDR 2018) or tables in IDR 2018
Bykova et al. 2017 • BACI International Trade Database Figures: 4.2, 4.14–4.15
• The Trade Unit Value Database
de Macedo and Lavopa 2017 • Eora Multiregion Input-Output Database Figures: 3.1, 3.3–3.9
• OECD Inter-Country Input-Output Tables Database, Edition 2016
Duarte 2017 • World Bank International Comparison Program Figure 1.6; Table C4.1
Foster-McGregor et al. 2017b • BACI International Trade Database Figures: 4.9.–4.13
• The Trade Unit Value Database
Haider 2017 • OECD Inter-Country Input-Output Tables Database, Edition 2015 Figures: 3.14, 3.15
• Eora Multiregion Input-Output Database
Lewis and Peng 2017 • United Nations National Accounts Statistics Database Figures: 2.13–2.14;
• UNIDO INDSTAT 2, ISIC Rev. 3 Database Table C5.1
Mazzanti et al. 2017 • Eora Multiregion Input-Output Database Figures: 5.6–5.10
• World Bank World Development Indicators Database
Moneta and Stepanova 2017 • World Bank Global Consumption Database Figures: 2.3–2.8,
A2.1–A2.2; Table A1.1
Padilla 2017 • European Commission Eurobarometer Figure 5.18
• National Geographic and GlobeScan Greendex
• OECD Database on Policy Instruments for the Environment
• WU Global Material Flows Database
• World Bank World Development Indicators Database
Pontoni and Bruschi 2017 • European Commission Eurobarometer Table 5.1
• National Geographic and GlobeScan Greendex
222
Table D1.2
Classifications used for producing Industrial Development Report (IDR) 2018 figures and tables and their D
datasets
Type of classification Reference in Further Corresponding figures or
Annex D
Classification used in IDR 2018 IDR 2018 information tables in IDR 2018
Regional classification Africa, Americas, Asia Upadhyaya 2013 Annex C1, Figures: 3.9, 4.3–4.9, 4.11, 4.13,
and Pacific and Europe and UNIDO 2017e Table C1.1 7.7–7.8; Tables: 7.1–7.2, 7.6–7.8,
A3.1, B1.1–B1.7, B2.1–B2.4
Industrialization level Industrialized Upadhyaya 2013 Annex C1, Figures: 2.3, 2.8–2.9, 2.13–2.14,
classification economies, Emerging and UNIDO 2017e Table C1.2 2.16, 3.1, 3.3–3.9, 3.14, 4.2–4.9,
industrial economies, 4.11, 4.13–4.15, 5.8, 7.1, 7.3–7.6,
Other developing 7.9–7.10, 7.12–7.18, 7.20–7.21,
economies and Least Box 3.1 Figures 1–2; Tables: 7.1–
developed countries 7.2, 7.4–7.7, A2.1–A2.2, A3.1,
B2.1–B2.4
Income classification High, Upper-middle, UNIDO 2017e Annex C1, Figure 5.11; Tables: 7.1–7.2,
Lower-middle and Low Table C1.3 7.6–7.8, B1.1–B1.7, B2.1–B2.4
income
Higher, Middle, Low World Bank 2014 Figure 2.2 Figures: 2.3–2.4, 2.6, 3.18,
and Lowest income and Annex A1, A2.1–A2.2
Table A1.1
Sector classification ISIC Rev. 3 (23 UNSD n.d. a Annex C2, Figures: 2.12, 4.10, 4.12;
manufacturing sectors) Table C2.1 Tables: 7.4–7.5
Eora Multiregion Lenzen et al. Annex C2, Figures: 1.6, 3.1–3.13, 3.15,
Input-Output Database 2012 and 2013 Table C2.2 5.6–5.7, 5.9–5.10
(25 sectors, 9
manufacturing sectors)
OECD Inter-Country OECD 2017c Annex C2, Figure 1.6; Tables: 3.1–3.2
Input-Output Database Table C2.3
(34 sectors, 16
manufacturing sectors)
Technology Medium- and high‑tech UNIDO 2017c Annex C3, Table B3.1
classification of Table C3.1
medium- and high‑tech
manufacturing exports
Technology High-, medium-high-, OECD 2011b Annex C3, Figures: 4.14–4.15, 7.10, 7.19,
classification of medium-low- and Table C3.2 7.21; Tables: 7.6, B1.1–B1.5,
manufacturing sectors low‑tech B2.2–B2.4, B3.1
Classification of 9 Consumption good UNSD n.d. b and Annex C4, Figures: 1.6, 2.1, 2.4–2.8,
individual consumption categories Duarte 2017 Table C4.1 3.12, 3.16–3.19, A2.1–A2.2,
of manufacturing Box 3.1 Figures 1–2
consumption goods
Classification of Consumer, Lewis and Peng Annex C5, Figure 2.14
manufacturing sectors Intermediate, Other 2017 Table C5.1
by final use of their investment and high-
products tech products
223
D Table D1.3
List of datasets used for production Industrial Development Report (IDR) 2018 figures and tables
Corresponding
Reference in figures and tables
Annex D
Dataset Description IDR 2018 in IDR 2018

Eora Multiregion Input-Output The Eora MRIO database provides a time series of Lenzen et al. 2012 Figures: 1.6,
(MRIO) Database high resolution input-output tables with matching and Lenzen et al. 3.1, 3.13–3.15,
environmental and social satellite accounts for 187 2013 5.6–5.10; Table
countries (represented by a total of 15,909 sectors) C2.2
for the period 1990–2012.
For more information please see: http://worldmrio.
com
Euromonitor International Euromonitor International Passport Database is a Euromonitor Figures: 2.9–
global market research database providing detailed International 2.11, 2.16–2.17
data and analysis on industries, economies, (Economies and
countries and consumers across 781 cities, 210 Consumers;
countries and markets and 27 industries. Possession
of Household
For more information please see: www.euromonitor. Durables, 2016)
com/
Eurostat Eurostat provides statistical information and covers Eurostat 2016 Figures:
all areas of European society with over 4,600 3.16–3.17, 3.19
datasets, containing more than 1.2 billion statistical
data values.
For more information please see: http://ec.europa.
eu/eurostat/web/main/home
Global National National Footprint Accounts measure the ecological Global Footprint Figure 5.3
Footprint Footprint resource use and resource capacity of nations over Network 2017a
Network Accounts time. Based on approximately 15,000 data points
per country per year, the accounts calculate the
footprints of more than 200 countries, territories,
and regions from 1961 to the present.
For more information please see: www.
footprintnetwork.org/resources/data/
Global Material Flows The Global Material Flow database WU 2015 Figure 5.18
Database comprehensively comprises data on the extraction
of a large number of different raw materials in
annual time series, following the accounting
standards of economy-wide material flow
accounting as developed by Eurostat and the
OECD. The database is set up and administrated
by the Vienna University of Economics and
Business and covers more than 200 countries, the
time period of 1980 to 2013, and more than 300
different materials aggregated into 12 categories.
For more information please see: www.
materialflows.net
International World Energy The World Energy Statistics online data service World Energy Figures: 7.22–
Energy Statistics contains key energy statistics for over 150 countries Statistics and 7.25
Agency and and regions. Data are provided in original units Balances © OECD/
Organisation for the different types of coal, oil, natural gas, IEA 2017, www.
for Economic renewables and waste, as well as for electricity and iea.org/statistics.
Co-operation heat. Data are available from 1971 (1960 for OECD Licence: www.
and countries) onwards. iea.org/t&c; as
Development modified by
For more information please see: https://
(OECD) UNIDO.
www.iea.org/statistics/relateddatabases/
worldenergystatistics/
224
Table D1.3 (continued)
List of datasets used for production Industrial Development Report (IDR) 2018 figures and tables D
Corresponding
Annex D
International Trends The Trends Econometric Models database is ILO 2016 Figures: 1.2–1.3,
Labour Econometric used to produce estimates and projections of 7.11–7.16
Organization Models unemployment, employment, employment by
Databases industry and broad occupational group,status in
employment and labour productivity. The output
of the model is a complete matrix of data for 188
countries.
For more information please see: www.ilo.org/
ilostat-files/Documents/ILO%20estimates%20
and%20projections%20methodological%20note.
pdf
Key Indicators KILM 2015 offers data for over 200 countries and Key Indicators of Figures: 1.2, 1.3,
of the Labour the 17 KILM indicators provide detailed information the Labour Market 7.11–7.16
Market (KILM), related to 36 data tables, including indicators on (2013 and 2015)
Edition 8 employment (occupation, status, sector, hours,
and 9 etc.), labour underutilization and the characteristics
of job seekers, education, wages, labour
productivity and working poverty.
For more information please see: www.ilo.org/
global/statistics-and-databases/research-and
-databases/kilm/lang--en/index.htm
National Greendex Greendex measures and monitors consumer National Figures: 5.12,
Geographic 2014 progress toward environmentally sustainable Geographic and 5.19
and behavior in 65 areas relating to housing, GlobeScan 2014
GlobeScan transportation, food and consumer goods.
Greendex 2014 ranks average consumers in 18
countries—up from 14 in 2008 for which changes
are tracked—according to the environmental
impact of their discretionary and nondiscretionary
consumption patterns within these four major
categories.
For more information please see: http://
images.nationalgeographic.com/wpf/media-
content/file/NGS_2014_Greendex_Highlights_
FINAL-cb1411689730.pdf
225
D Table D1.3 (continued)
Corresponding
Annex D

National National The National Bureau of Statistics of China is in National Bureau of Figure 3.17
Statistics Bureau of charge of statistics and economic accounting in Statistics of China
Statistics of China. 2016
China For more information please see: www.stats.gov.
cn/english/
U.S. Bureau The Bureau of Labor Statistics of the U.S. U.S. Bureau of Figure 3.16
of Labor Department of Labor is the principal federal agency Labor Statistics
Statistics responsible for measuring labor market activity, 2017
working conditions, and price changes in the
economy.
For more information please see: https://www.bls.
gov/
Japan The Statistics Bureau is responsible for planning Japan Statistics Figure 3.16
Statistics and executing major censuses and statistical Bureau, Ministry of
Bureau, surveys and compiling and disseminating statistical Internal Affairs and
Ministry of information. Communications
Internal Affairs website (www.stat.
For more information please see: www.stat.go.jp/
and Commu- go.jp/english/data/
english/
nications cpi/1588.htm#his),
2017
National The Institute of Statistics and Geography is an National Institute Figure 3.17
Institute of autonomous public body responsible for regulating of Statistics and
Statistics and and coordinating the National Statistical System Geography of
Geography of and Geographic Information, as well as to capture Mexico, Prices
Mexico and disseminate information of Mexico in terms of Indices 2017,
territory, resources, population and economy.
For more information please see: www.beta.inegi.
org.mx/
Statistics Statistics South Africa is the national statistical Statistics South Figure 3.17
South Africa service of South Africa. Africa 2017
For more information please see: www.statssa.gov.
za/
Organisation OECD The OECD ICIOTs database describe the sale and OECD 2017c Figure 1.6;
for Economic Inter‑Country purchase relationships between producers and Tables: 3.1–3.2
Co-operation Input-Output consumers within an economy.
and Tables The latest set of IOTs presents matrices of inter-
Development (ICIOTs) industrial flows of goods and services in current
(OECD) database, prices ($ million), for all OECD countries and 28
Databases 2016 Edition non-member economies, covering the years 1995
to 2011 .
For more information please see: www.oecd.org/
sti/ind/inter-country-input-output-tables.htm
226
Table D1.3 (continued)
List of datasets used for production Industrial Development Report (IDR) 2018 figures and tables D
Corresponding
Annex D
UNIDO UNIDO The INDSTAT2 database contains time series UNIDO 2016 and Figures: 2.12–
Statistics INDSTAT 2, data on the manufacturing sector for the period 2017d 2.14, 7.10;
Databases ISIC Rev. 3 1963 onwards for 170 countries. The database Tables: 7.4–7.6,
Database contains eight principle indicators of industrial B1.5
statistics, including the index numbers of industrial
production, which show the real growth of the
volume of production by 2-digit of ISIC Rev. 3.
The data are arranged at the 2-digit level of the
International Standard Industrial Classification of
All Economic Activities revision 3 pertaining to
the manufacturing sector, which comprises 23
industries.
For more information please see: www.unido.org/
en/resources/statistics/statistical-databases.html
Manufacturing The MVA database contains country data for GDP, UNIDO 2017f Figures: 1.1,
Value Added MVA and population for the period starting with 1.3–1.5, 7.1–7.9,
(MVA) 2017 1990 to the latest year available. GDP and MVA 7.16–7.17, 7.20,
database data are given at current and constant prices (2005) 7.23–7.25;
in $. Tables: 7.1–7.3,
B1.1–B1.2, B1.4,
For more information please see: www.unido.org/ B1.6, B1.8
en/resources/statistics/statistical-databases.html
Competitive UNIDO offers its CIP Index on stat.unido.org. UNIDO 2017b Figure 8.2;
Industrial The CIP index benchmarks national industrial Tables: 8.2–8.6,
Performance performance of more than 110 countries using B3.1
(CIP) Index indicators of an economy’s ability to produce and
database, export manufactured goods competitively.
2017 edition For more information please see: www.unido.org/
resources/statistics/statistical-databases.html?L=2
United United UN Comtrade Database is a repository of official UNSD 2016a and Figures: 5.11
Nations Nations trade statistics and relevant analytical tables. It 2017 7.18–7.21;
Commodity Commodity contains annual trade statistics starting from 1962 Tables: 7.7–7.8,
Trade Trade from over 170 reporter countries/areas. B1.1–B1.3, B1.5,
Statistics (UN Statistics (UN B1.7, B2.1–B2.4
For more information please see:
Comtrade) Comtrade) http://comtrade.un.org
Database database
BACI BACI is the world trade database developed by the Gaulier and Figures: 4.2–
International CEPII and provides bilateral values and quantities of Zignago 2010 4.15; Table A3.1
Trade exports at the HS 6-digit product disaggregation,
database for more than 200 countries since 1995. Original
data are provided by the United Nations Statistical
Division (COMTRADE database).
For more information please see www.cepii.fr/
CEPII/en/bdd_modele/presentation.asp?id=1
The Trade TUVD is a worldwide unit value database Berthou and Figures: 4.2,
Unit Value developed by the CEPII and contains Unit Value Emlinger 2011 4.9–4.15
Database information (in $ per ton) over the period 2000-
(TUVD) 2015, with 182 reporters, 253 partners, and more
than 5,000 product categories per year. Import and
export unit values are provided at the 6-digits level
of the Harmonized System.
For more information please see: www.cepii.fr/
CEPII/en/bdd_modele/presentation.asp?id=2
United United The National Accounts Statistics database contains UN 2015 Figure 2.13
Nations Nations detailed national accounts data for most countries
National National and areas of the world. (Data availability varies
Accounts Accounts across countries and fiscal years as not all UN
Statistics Statistics member countries are able to provide a complete
Database set of data.)
For more information, please see: https://unstats.
un.org/unsd/nationalaccount/madt.asp
227
D Table D1.3 (continued)
Corresponding
Annex D

University of Penn World The Penn World Table database provides Heston et al. 2012 Figures: 2.12,
Groningen Table information on relative levels of income, output, and Feenstra et al. 3.10, 3.13
Growth and Database input and productivity. 2015
Development (Version 7.1 The version 9.0 covers 182 countries between
Centre and 9.0) 1950 and 2014; and the version 7.1 includes 189
Databases countries and territories for the period 1950-2010,
and uses 2005 as the reference year.
For more information please see: www.rug.nl/ggdc/
productivity/pwt/
World Bank Global The Global Consumption Database is a one- World Bank 2014 Figures: 2.2–2.8,
Databases Consumption stop source of data on household consumption 3.18, A2.1–A2.2;
Database patterns in developing countries. The data are Table A1.1
based on national household surveys, which
collect information for a group of households
representative of the entire country. Four levels of
consumption are used to segment the market in
each country.
http://datatopics.worldbank.org/consumption/
AboutDatabase
World The World Development Indicators Database offers World Bank 2016b Figures: 2.1,
Development global development data, and includes national, and 2017b 2.10, 2.12, 2.16–
Indicators regional and global estimates. The database covers 2.17, 5.9–5.11,
Database 217 economies and the years 1960–2016. 5.18; Table A3.1
http://data.worldbank.org/data-catalog/
world-development-indicators
International The ICP is a worldwide statistical initiative led by World Bank 2008 Figures: 1.6, 2.1,
Comparison the World Bank under the auspices of the United and 2015 3.12–3.13, Box
Program (ICP) Nations Statistical Commission, with the main 3.1 Figures 1–2
(2005 and objective of providing comparable price and volume
2011) measures of gross domestic product (GDP) and
its expenditure aggregates among countries within
and across regions.
The set of 2011 ICP results contains data for
199 countries and covers overs 26 expenditures
categories for goods and services, and several
indicators including PPPs, expenditure shares of
GDP, total and per capita expenditures in US dollar
both in exchange rate terms and purchasing power
parity (PPP) terms, and price level indices.
The set of 2005 ICP results provides information
for 146 economies on GDP, GDP per capita,
household consumption, collective government
consumption, and capital formation.
For more information please see: www.worldbank.
org/en/programs/icp#5
228
References
Acemoglu, D., Autor, D., Dorn, D., Hanson, G.H. and Competition in the United States. American Economic
Price, B., 2016. Import Competition and the Great US Review, 103(6), pp. 2121–2168.
Employment Sag of the 2000s. Journal of Labor Econom- Baffes, J. and Dennis, A., 2013. Long-Term Drivers of Food
ics, 34(1), pp. 141–198. Prices. Policy Research Working Paper 6455. Wash-
Acemoglu, D. and Ventura, J., 2002. The World Income Dis- ington, DC: World Bank. © World Bank. https://
tribution. The Quarterly Journal of Economics, 117(2), openknowledge.worldbank.org/handle/10986/15594
pp. 659–694. License: CC BY 3.0 IGO.
Aggarwal, V.K. and Evenett, S.J., 2014. Do WTO Rules Baffes, J. and Etienne, X.L., 2016. Analysing Food Price
Preclude Industrial Policy? Evidence from the Trends in the Context of Engel’s Law and the Prebisch-
Global Economic Crisis. Business and Politics, 16(4), Singer Hypothesis. Oxford Economic Papers, 68(3),
pp. 481–509. pp. 688–713.
Annan, K.A., 2000. We the Peoples—The Role of the United Baldwin, R., 2006. Globalisation: the Great Unbundling(s).
Nations in the 21st Century. New York, NY: United Globalisation Challenges for Europe and Finland. Hel-
Nations. sinki: Secretariat of the Economic Council, Finnish
Albrecht, J., 2006. The Use of Consumption Taxes to Re- Prime Minister’s Office.
Launch Green Tax Reforms. International Review of Banda, G., Wangwe, S. and Mackintosh, M., 2016. Making
Law and Economics, 26(1), pp. 88–103. Medicines in Africa: An Historical Political Economy
Alkire, S. and Santos, M.E., 2013. A Multidimensional Overview. In: Making Medicines in Africa: The Political
Approach: Poverty Measurement & Beyond. Social Economy of Industrializing for Local Health, eds. Mack-
Indicators Research, 112(2), pp. 239–257. intosh, M., Banda, M., Tibandebage, P. and Wamae, W.,
Amiti, M., Dai, M., Feenstra, R.C. and Romalis, J., 2017. International Political Economy Series. London: Pal-
How Did China’s WTO Entry Benefit U.S. Consum- grave MacMillan, pp. 7–24.
ers? NBER Working Paper 23487. Cambridge, MA: Banerjee, A.V. and Duflo, E., 2007. The Economic Lives
National Bureau of Economic Research. of the Poor. Journal of Economic Perspectives, 21(1),
Appelbaum, E. and Schettkat, R., 1995. Employment and pp. 141–168.
Productivity in Industrialized Economies. International Barrett, S., 1994. Self-Enforcing International Environmen-
Labour Review, 134(4–5), pp. 605–623. tal Agreements. Oxford Economic Papers, 46(Special
Aristy Escuder, J., 2016. Análisis del Impacto de la Política Issue on Environmental Economics), pp. 878–894.
de Compras y Contrataciones Públicas en las MIPYMEs Barrientos, S.W., 2013. ‘Labour Chains’: Analysing the
y Mujeres en la República Dominicana. Santo Domingo: Role of Labour Contractors in Global Production
United Nations Development Programme. Networks. The Journal of Development Studies, 49(8),
Aschemann-Witzel, J., Zielke, S. and Thøgersen, J., 2014. pp. 1058–1071.
Income and Price as a Barrier to Organic Food Choice. Barrientos, S.W., Gereffi, G. and Rossi, A., 2011. Economic
In: Building Organic Bridges. Argentina—France. Pro- and Social Upgrading in Global Production Networks:
ceedings of the 4th ISOFAR Scientific Conference at the A New Paradigm for a Changing World. International
Organic World Congress 2014, eds. Rahmann, G. and Labour Review, 150(3–4), pp. 319–340.
Aksoy, U., Istanbul: International Society of Organic Barro, R.J. and Sala-i-Martin, X.I., 1995. Economic Growth.
Agriculture Research, pp. 175–178. New York, NY: McGraw-Hill.
Autor, D.H., Dorn, D. and Hanson, G.H., 2013. The China Bartzokas, A., 2007. Monitoring and Analysis of Policies
Syndrome: Local Labor Market Effects of Import and Public Financing Instruments Conductive to Higher
229
Levels of R&D Investments: The ‘Policy Mix’ Project. Energy Efficiency India. Available at: www.beestarlabel.
Country Review Korea. Maastricht: United Nations com/Content/Files/Scheme%20of%20energ y%20
University—Maastricht Economic and Social Research efficiency%20labelling.pdf [Accessed April 13, 2017].
Bykova, A., Ghodsi, M. and Stehrer, R., 2017. The Evolution
References
Institute on Innovation and Technology.

Bate, R., 2010. Are Drugs Made in Emerging Markets Good of Trade Unit Values: a Measurement on Quality. Back-
Quality? A Preliminary Assessment of Product Consist- ground paper prepared for the Industrial Development
ency by Use of Raman Spectra. Washington, DC: Ameri- Report 2018. Vienna: United Nations Industrial Devel-
can Enterprise Institute for Public Policy Research. opment Organization.
Becker, G.S., 1965. A Theory of the Allocation of Time. The CAAM (China Association of Automobile Manufactur-
Economic Journal, 75(299), pp. 493–517. ers), 2016. New Energy Vehicles Enjoyed a High-Speed
Berthou, A. and Emlinger, C., 2011. The Trade Unit Val- Growth. Available at: www.caam.org.cn/Automotives
ues Database. CEPII Working Paper 10. Paris: Centre Statistics/20160120/1305184260.html [Accessed
d’Études Prospectives et d’Informations Internationales. April 12, 2017].
BIO Intelligence Service, 2012. Policies to Encourage Sus- ———, n.d. Automotives Statistics. Available at: www.caam.
tainable Consumption. Final report prepared for Euro- org.cn/english/newslist/a101–1.html [Accessed April
pean Commission (DG ENV). Paris. 13, 2017].
Bittman, M., Rice, J.M. and Wajcman, J., 2004. Appliances Cadot, O., Carrère, C. and Strauss-Kahn, V., 2011. Export
and Their Impact: The Ownership of Domestic Tech- Diversification: What’s Behind the Hump? The Review
nology and Time Spent on Household Work. British of Economics and Statistics, 93(2), pp. 590–605.
Journal of Sociology, 55(3), pp. 401–423. Cameron, A., Mantel-Teeuwisse, A.K., Leufkens, H.G.M.
Bleischwitz, R., Dittrich, M. and Pierdicca, C., 2012. Col- and Laing, R.O., 2012. Switching from Originator
tan from Central Africa, International Trade and Impli- Brand Medicines to Generic Equivalents in Selected
cations for Any Certification. Resources Policy, 37(1), Developing Countries: How Much Could be Saved?
pp. 19–29. Value in Health, 15(5), pp. 664–673.
Bloom, N., Draca, M. and Van Reenen, J., 2016. Trade Cantore, N. and Cheng, C.F.C., 2017. International Trade
Induced Technical Change? The Impact of Chinese of Environmental Goods in Gravity Models. Background
Imports on Innovation, IT and Productivity. The Review paper prepared for the Industrial Development Report
of Economic Studies, 83(1), pp. 87–117. 2018. Vienna: United Nations Industrial Development
Bloomberg New Energy Finance, 2017. Electric Vehicle Out- Organization.
look 2017. Executive Summary. London. Caraway, T.L., 2007. Assembling Women: The Feminization
Bolt, J. and van Zanden, J.L., 2014. The Maddison Project: of Global Manufacturing. 1st Edition. Ithaca, NY: Cor-
Collaborative Research on Historical National Accounts. nell University Press.
The Economic History Review, 67(3), pp. 627–651. Card, D. and Krueger, A.B., 1994. Minimum Wages and
Broda, C. and Romalis, J., 2008. Inequality and Prices: Does Employment: A Case Study of the Fast-Food Industry
China Benefit the Poor in America? First Draft, March in New Jersey and Pennsylvania. The American Economic
26. Chicago, IL: University of Chicago. Review, 84(4), pp. 772–793.
Broda, C. and Weinstein, D.E., 2004. Variety Growth and Casier, L., Huizenga, R., Perera, O., Ruete, M. and Turley,
World Welfare. American Economic Review, 94(2), L., 2015. Handbook for the Inter-American Network on
pp. 139–144. Government Procurement (INGP). Implementing Sus-
———, 2006. Globalization and the Gains from Variety. The tainable Public Procurement in Latin America and the
Quarterly Journal of Economics, 121(2), pp. 541–585. Caribbean: Optimizing Value-for-Money across Asset
Bureau of Energy Efficiency India, 2016. Guidelines for Per- Lifecycles. Winnipeg: International Institute for Sustain-
mittee-standards and Labeling Program of BEE. Bureau of able Development.
230
Chai, A., 2017. Household Consumption Patterns and the Compras Dominicana, 2012. Contrataciones Públicas y
Sectoral Composition of Growing Economies: A Review MASPYMES Capacitan MIPYMES. Available at: www.
of the Interlinkages. Background paper prepared for the comprasdominicana.gov.do/-/contrataciones-publicas
References
Industrial Development Report 2018. Vienna: United -y-maspymes-capacitan-mipymes [Accessed May 8,
Nations Industrial Development Organization. 2017].
Chang, H.-J., 1997. Luxury Consumption Control and Eco- Congreso Nacional, Republica Dominicana, 2008. Régi-
nomic Development. Background paper prepared for men Regulatorio para el Desarrollo y Competitividad de
Trade and Development Report 1997. Geneva: United las Micro, Pequeñas y Medianas Empresas (MIPYMES),
Nations Conference on Trade and Development. pp. 488–508.
Chaudhuri, S. and West, A., 2015. Can Local Producers Convery, F., McDonnell, S. and Ferreira, S., 2007. The Most
Compete with Low-cost Imports? A Simulation Study Popular Tax in Europe? Lessons from the Irish Plastic
of Pharmaceutical Industry in Low-income Africa. Inno- Bags Levy. Environmental and Resource Economics,
vation and Development, 5(1), pp. 23–38. 38(1), pp. 1–11.
Chen, B. and Ma, H., 2012. Import Variety and Welfare CORFO (Corporación de Fomento de la Producción de
Gain in China. Review of International Economics, Chile) and InvestChile, 2017. Opportunities to Lithium
20(4), pp. 807–820. Value Added Integration in Chile. Presentation to the
Cho, C., Kim, K. and Kim, M., 2014. 2014 Modularization Roadshow Lithium Call Chile in Frankfurt, 18th May.
of Korea’s Development Experience: Korea’s Automotive Creedy, J., 2015. The Welfare Gain from a New Good: An Intro-
Industry. Knowledge Sharing Programme. Seoul: Min- duction. 2. Wellington: Victoria University of Wellington.
istry of Strategy and Finance, Republic of Korea. de Macedo, A.C. and Lavopa, A., 2017. Tracing the Incomes
Clements, K.W. and Chen, D., 1996. Fundamental Similari- Generated by Domestic and Foreign Demand for Manu-
ties in Consumer Behaviour. Applied Economics, 28(6), facturing. Background paper prepared for the Industrial
pp. 747–757. Development Report 2018. Vienna: United Nations
Clifford, M.L., 2016. Chinese Government Subsidies Play Industrial Development Organization.
Major Part in Electric Car Maker BYD’s Rise. Forbes. Avail- de Macedo, A.C., Delera, M. and Lavopa, A., 2017. Indus-
able at: www.forbes.com/sites/mclifford/2016/07/26/ trial Development and the Creation of Affordable Variety.
with-a-little-help-from-its-friends-lavish-chinese Background paper prepared for the Industrial Develop-
-government-help-for-top-electric-car-maker-byd/ ment Report 2018. Vienna: United Nations Industrial
[Accessed August 15, 2017]. Development Organization.
COFEPRIS (Comisión Federal para la Protección con- de V. Cavalcanti, T.V. and Tavares, J., 2008. Assessing the
tra Riesgos Sanitarios), 2015. Gestión de la Salud ‘Engines of Liberation’: Home Appliances and Female
Pública en México. Available at: www.cofepris.gob.mx/ Labor Force Participation. The Review of Economics and
Documents/NotasPrincipales/08012015.pdf [Accessed Statistics, 90(1), pp. 81–88.
March 29, 2017]. Debare, P. and Lee, H., 2010. The Real-side Determinants of
———, 2016. Relación de Terceros Autorizados. Avail- Countries’ Terms of Trade: A Panel Data Analysis. Work-
able at: www.gob.mx/cofepris/documentos/relacion-de ing Paper. Charlottesville, VA: Darden School of Busi-
-terceros-autorizados [Accessed March 29, 2017]. ness, University of Virginia.
COMISCA (Council of Ministers of Health of Central DeLong, J.B., 2000. Cornucopia: The Pace of Economic
America and the Dominican Republic), 2016. Nego- Growth in the Twentieth Century. NBER Working
ciación Conjunta de Precios y Compra de Medicamen- Papers 7602. Cambridge, MA: National Bureau of Eco-
tos para Centroamérica y República Dominicana: Una nomic Research.
Mirada Desde la Perspectiva de Salud Internacional. El Department of Trade and Industry, South Africa, 2017.
Salvador. Engagement on Challenges Facing Industry with Respect
231
to Local Public Procurement. Presentation to the Portfo- Ely, A., Geall, S. and Song, Y., 2016. Sustainable Maize
lio Committee of Trade and Industry, 24 March. Production and Consumption in China: Practices and
DGCP (Dirección General Contrataciones Públicas), Politics in Transition. Journal of Cleaner Production,
2015. Boletín Anual Sobre Compras del SNCP. Alcance:
References
134(Part A), pp. 259–268.

Enero-Diciembre 2015. Santo Domingo. Engel, E., 1895. Die Lebenskosten Belgischer Arbeiterfami-
Dinkelman, T., 2011. The Effects of Rural Electrification lien Früher und Jetzt: Ermittelt aus Familien-Haushalt-
on Employment: New Evidence from South Africa. The rechnungen und Vergleichend Zusammengestellt. Inter-
American Economic Review, 101(7), pp. 3078–3108. national Statistical Bulletin, 9(1), pp. 1–124.
Dolan, C., Johnstone-Louis, M. and Scott, L., 2012. Sham- eTenders Sri Lanka, 2017. About Us. Available at: www3.
poo, Saris and SIM Cards: Seeking Entrepreneurial etenders.lk/about_us.html [Accessed March 29, 2017].
Futures at the Bottom of the Pyramid. Gender and Euromonitor International—Economies and Consum-
Development, 20(1), pp. 33–47. ers; Possession of Household Durables, 2016. Passport
Dornbusch, R., Fischer, S. and Samuelson, P.A., 1977. Com- Euromonitor International. Database. Available at:
parative Advantage, Trade, and Payments in a Ricardian http://go.euromonitor.com/passport.html [Accessed
Model with a Continuum of Goods. The American Eco- September 25, 2017].
nomic Review, 67(5), pp. 823–839. European Central Bank, 2006. Monthly Bulletin August.
Dowding, K., 2009. What is Welfare and How Can We Frankfurt.
Measure it? In: The Oxford Handbook of Philosophy of European Commission, 2016. Buying Green! A Handbook
Economics, eds. Ross, D. and Kincaid, H., New York, on Green Public Procurement. 3rd Edition. Brussels:
NY: Oxford University Press. European Union.
Duarte, M., 2017. Manufacturing Consumption, Relative ———, 2017a. Green Public Procurement. Available at:
Prices, and Productivity. Background paper prepared http://ec.europa.eu/environment/gpp/index_en.htm
for the Industrial Development Report 2018. Vienna: [Accessed October 23, 2017].
United Nations Industrial Development Organization. ———, 2017b. Public Procurement. Available at: https://
Duflo, E., 2012. Women Empowerment and Economic ec.europa.eu/growth/single-market/public-procurement
Development. Journal of Economic Literature, 50(4), _en [Accessed October 23, 2017].
pp. 1051–1079. ———, 2017c. Public Procurement. Available at: http://
Eder, J.M., Mutsaerts, C.F. and Sriwannawit, P., 2015. ec.europa.eu/trade/policy/accessing-markets/public
Mini-Grids and Renewable Energy in Rural Africa: -procurement/ [Accessed March 30, 2017].
How Diffusion Theory Explains Adoption of Electric- ———, 2017d. Resource Efficiency. Available at: http://
ity in Uganda. Energy Research and Social Science, 5, ec.europa.eu/environment/resource_efficiency/
pp. 45–54. [Accessed August 30, 2017].
Edwards, L. and Jenkins, R., 2015. The Impact of Chinese Eurostat, 2016. Harmonised Indices of Consumer Prices.
Import Penetration on the South African Manufactur- Available at: http://ec.europa.eu/eurostat/tgm/table.do
ing Sector. The Journal of Development Studies, 51(4), ?tab=table&init=1&language=en&pcode=teicp000&
pp. 447–463. plugin=1 [Accessed January 6, 2017].
Eicher, T.S. and Kuenzel, D.J., 2016. The Elusive Effects Everett M., R., 2003. Diffusion of Innovations, Fifth edition.
of Trade on Growth: Export Diversity and Economic New York, NY: Free Press.
Take-off. Canadian Journal of Economics/Revue cana- Evans, L., Nuttall, C., Rosenow, J., Iraldo, F., Barberio, M.,
dienne d’économique, 49(1), pp. 264–295. Paglialunga, A., Gasbarro, F. and Nucci, B. 2015. Project
Ellen MacArthur Foundation, 2016. Circular Economy in to Support the Evaluation of the Implementation of the
India: Rethinking Growth for Long-Term Prosperity. EU Ecolabel Regulation. ENV.A.1/SER/2013/0065r.
Cowes. Brussels: European Union.
232
Ewing, B., Reed, A., Galli, A., Kitzes, J. and Wackernagel, Foster-McGregor, N., Sartorello Spinola, D. and Verspagen,
M., 2010. Calculation Methodology for the National B., 2017a. Developments in Manufacturing Unit Values
Footprint Accounts, 2010 Edition. Oakland, CA: Global Across Countries. Background paper prepared for the
References
Footprint Network. Industrial Development Report 2018. Vienna: United
Executive Office of the President of the United States, 2014. Nations Industrial Development Organization.
The Cost of Delaying Action to Stem Climate Change. ———, 2017b. On the Development and Impact of Commod-
Washington, DC. ity Prices and Cycles. Background paper prepared for the
Faber, B., 2012. Trade Liberalization, the Price of Quality, Industrial Development Report 2018. Vienna: United
and Inequality: Evidence from Mexican Store Prices. Nations Industrial Development Organization.
Mimeo. Freeman, R.B., 2009. Labor Regulations, Unions, and Social
FAO (Food and Agriculture Organization of the United Protection in Developing Countries: Market Distor-
Nations), 2016. The State of Food And Agriculture 2016. tions or Efficient Institutions? NBER Working Paper
Climate Change, Agriculture and Food Security. Rome. 14789. Cambridge, MA: National Bureau of Economic
———, n.d. a. Organic Agriculture: Why is Organic Food Research.
More Expensive Than Conventional Food? Available at: Frenken, K., Saviotti, P.P. and Trommetter, M., 1999. Vari-
www.fao.org/organicag/oa-faq/oa-faq5/en/ [Accessed ety and Niche Creation in Aircraft, Helicopters, Motor-
September 15, 2017]. cycles and Microcomputers. Research Policy, 28(5),
———, n.d. b. Organic Agriculture. FAQ: What Are the pp. 469–488.
Environmental Benefits of Organic Agriculture? Avail- Funke, M. and Ruhwedel, R., 2001. Product Variety and
able at: www.fao.org/organicag/oa-faq/oa-faq6/en/ Economic Growth: Empirical Evidence for the OECD
[Accessed September 15, 2017]. Countries. IMF Staff Papers, 48(2), pp. 225–242.
Feenstra, R.C. and Romalis, J., 2014. International Prices Galarraga, I., Heres, D.R. and Gonzalez-Eguino, M., 2011.
and Endogenous Quality. The Quarterly Journal of Eco- Price Premium for High-Efficiency Refrigerators and
nomics, 129(2), pp. 477–527. Calculation of Price-Elasticities for Close-Substitutes:
Feenstra, R.C., Inklaar, R. and Timmer, M.P., 2015. The A Methodology Using Hedonic Pricing and Demand
Next Generation of the Penn World Table. American Systems. Journal of Cleaner Production, 19(17–18),
Economic Review, 105(10), pp. 3150–3182. pp. 2075–2081.
Foellmi, R., Wuergler, T. and Zweimüller, J., 2014. The Mac- Ganchero, E.G.A. and Pavia, C.V., 2007. UNILAB’s Rite-
roeconomics of Model T. Journal of Economic Theory, Med Initiative: Making Medicine Accessible to the Poor.
153, pp. 617–647. Growing Inclusive Markets. Case Study. New York, NY:
Fontana, M., Forthcoming. Inclusive and Sustainable Indus- United Nations Development Programme.
trialization: The Gender Dimension. Vienna: United Garnett, T. and Wilkes, A., 2014. Appetite for Change. Social,
Nations Industrial Development Organization. Economic and Environmental Transformations in China’s
Foray, D., Mowery, D.C. and Nelson, R.R., 2012. Pub- Food System. Oxford: Food Climate Research Network.
lic R&D and Social Challenges: What Lessons from Gasper, D., 2007. Human Well-being: Concepts and Con-
Mission R&D Programs? Research Policy, 41(10), ceptualizations. In: Human Well-Being, ed. McGillivray
pp. 1697–1702. M., Studies in Development Economics and Policy.
Foster-McGregor, N., Isaksson, A. and Kaulich, F., 2013. London: Palgrave Macmillan, pp. 23–64.
Importing, Productivity and Absorptive Capacity in Sub- Gaulier, G. and Zignago, S., 2010. BACI: International
Saharan African Manufacturing Firms. Business Invest- Trade Database at the Product-Level: the 1994–2007
ment Technology Services Working Paper 8/2013. Version. CEPII Working Paper 23. Paris: Centre
Vienna: United Nations Industrial Development d’Études Prospectives et d’Informations Internationales.
Organization.
233
Gereffi, G., 2015. Global Value Chains, Development and of Trade of Developing Countries: What the Long
Emerging Economies. Inclusive and Sustainable Indus- Run Shows. The World Bank Economic Review, 2(1),
trial Development Working Paper Series 18. Vienna: pp. 1–47.
Grossman, G.M. and Helpman, E., 1991. Innovation and
References
United Nations Industrial Development Organization.

Gereffi, G. and Fernandez-Stark, K., 2011. Global Value Chain Growth in the Global Economy. Cambridge, MA: The
Analysis: A Primer. Durham: Duke University Center on MIT Press.
Globalization, Governance and Competitiveness. Haider, A., 2017. The Multiplier Effects of Manufactur-
Ghalwash, T.M., 2008. Demand for Environmental Qual- ing Consumption. Background paper prepared for the
ity: An Empirical Analysis of Consumer Behavior in Industrial Development Report 2018. Vienna: United
Sweden. Environmental and Resource Economics, 41(1), Nations Industrial Development Organization.
pp. 71–87. Hallak, J.C. and Schott, P.K., 2011. Estimating Cross-Coun-
Ghodsi, M. and Stehrer, R., 2017. Avoiding and Escap- try Differences in Product Quality. The Quarterly Jour-
ing a ‘Commodity Trap’ in Development. Background nal of Economics, 126(1), pp. 417–474.
paper prepared for the Industrial Development Report Haraguchi, N., 2015. Patterns of Structural Change and
2018. Vienna: United Nations Industrial Development Manufacturing Development. In: Routledge Handbook
Organization. of Industry and Development, eds. Weiss, J. and Tribe, M.,
Global Footprint Network, 2017a. Global Footprint Net- New York, NY: Routledge, pp. 38–64.
work National Footprint Accounts, 2017 Edition. Haraguchi, N. and Rezonja, G., 2013. Pro-Employment
Database. Available at: www.footprintnetwork.org/ Manufacturing Development in Large Countries. Devel-
resources/data/ [Accessed September 24, 2017]. opment Policy, Statistics and Research Brand Work-
———, 2017b. Glossary. Available at: www.footprintnetwork. ing Paper 4/2012. Vienna: United Nations Industrial
org/resources/glossary/ [Accessed October 23, 2017]. Development Organization.
Goldberg, P.K. and Pavcnik, N., 2007. Distributional Effects Harvey, D.I., Kellard, N.M., Madsen, J.B. and Wohar, M.E.,
of Globalization in Developing Countries. Journal of 2010. The Prebisch-Singer Hypothesis: Four Centu-
Economic Literature, American Economic Association, ries of Evidence. The Review of Economics and Statistics,
45(1), pp. 39–82. 92(2), pp. 367–377.
Goldstein, A., 2002. Embraer: From National Champion to Hausman, J.A., 1996. Valuation of New Goods under Per-
Global Player. CEPAL Review, (77), pp. 97–115. fect and Imperfect Competition. In: The Economics of
Gong, H., Wang, M.Q. and Wang, H., 2013. New Energy New Goods, eds. Bresnahan, T. and Gordon, R.J., Chi-
Vehicles in China: Policies, Demonstration, and Pro- cago, IL: University of Chicago Press, pp. 207–248.
gress. Mitigation and Adaptation Strategies for Global Hausmann, R., Hwang, J. and Rodrik, D., 2007. What You
Change, 18(2), pp. 207–228. Export Matters. Journal of Economic Growth, 12(1),
Gordon, R.J., 2016. The Rise and Fall of American Growth: pp. 1–25.
The U.S. Standard of Living since the Civil War. Prince- Heston, A., Summers, R. and Aten, B., 2012. Penn World
ton, NJ: Princeton University Press. Table Version 7.1. Center for International Comparisons
Greenwood, J. and Kopecky, K.A., 2013. Measuring the of Production, Income and Prices at the University of
Welfare Gain from Personal Computers. Economic Pennsylvania.
Inquiry, 51(1), pp. 336–347. Hidalgo, C.A. and Hausmann, R., 2009. The Building
Greenwood, J., Seshadri, A. and Yorukoglu, M., 2005. Blocks of Economic Complexity. Proceedings of the
Engines of Liberation. Review of Economic Studies, National Academy of Sciences of the United States of
72(1), pp. 109–133. America, 106(26), pp. 10570–10575.
Grilli, E.R. and Yang, M.C., 1988. Primary Commod- Hinterberger, F., Giljum, S., Omann, I., Polsterer, N., Stocker,
ity Prices, Manufactured Goods Prices, and the Terms A., Burrell, L., Campregher, C., Fuchs, D. and Hartwig, F.,
234
2012. Green Growth: From Labour to Resource Productiv- .org/wiki/File%3AAll_forcing_ag ents_CO2_
ity. Best Practice Examples, Initiatives and Policy Options. equivalent_concentration.png [Accessed October 22,
Vienna and Paris: United Nations Industrial Development 2017].
ILO (International Labour Organization), 2011. ILO Dec-
References
Organization and Agence Française de Développement.
Hoornweg, D. and Bhada-Tata, P., 2012. What a Waste: A laration on Fundamental Principles and Rights at Work
Global Review of Solid Waste Management. Urban Devel- and its Follow-up—Adopted by the International Labour
opment Series Knowledge Papers 15. Washington, DC: Conference at Its Eighty-Sixth Session, Geneva, 18 June
World Bank. © World Bank. https://openknowledge. 1998 (Annex Revised 15 June 2010). Geneva.
worldbank.org/handle/10986/17388 License: CC BY ———, 2016. World Employment and Social Outlook. Trends
3.0 IGO. 2017. Data Set Trends Econometric Models. Geneva.
Hoornweg, D., Bhada-Tata, P. and Kennedy, C., 2013. Envi- Imbs, J. and Wacziarg, R., 2003. Stages of Diversification.
ronment: Waste Production Must Peak This Century. American Economic Review, 93(1), pp. 63–86.
Nature, 502, pp. 615–617. ITC (International Trade Centre), 2014. Empowering
Houthakker, H.S., 1957. An International Comparison Women through Public Procurement. Geneva.
of Household Expenditure Patterns, Commemorat- Jackson, R.B., Canadell, J.G., Le Quere, C., Andrew, R.M.,
ing the Centenary of Engel’s Law. Econometrica, 25(4), Korsbakken, J.I., Peters, G.P. and Nakicenovic, N., 2016.
pp. 532–551. Reaching Peak Emissions. Nature Climate Change, 6(1),
Hummels, D. and Klenow, P.J., 2005. The Variety and Qual- pp. 7–10.
ity of a Nation’s Exports. American Economic Review, Jaffee, S., Henson, S. and Diaz Rios, L., 2011. Making the
95(3), pp. 704–723. Grade: Smallholder Farmers, Emerging Standards, and
IEA (International Energy Agency), 2015. Achievements Development Assistance Programs in Africa—A Research
of Appliance Energy Efficiency Standards and Labelling Program Synthesis. Economic and Sector Work Report
Programs: A Global Assessment. Paris: IEA Publishing. 62324. Washington, DC: World Bank. @ World
———, 2016. Global EV Outlook 2016. Beyond One Bank. https://openknowledge.worldbank.org/handle/
Million Electric Cars. Paris: OECD Publishing 10986/2823 License: CC BY 3.0 IGO.
and International Energy Agency. http://dx.doi. Jalilian, H., 2017. Role of Internal and External Demand on
org/10.1787/9789264279469-en. Industrial Development. Background paper prepared
———, 2017. IEA World Energy Statistics and Balances, for the Industrial Development Report 2018. Vienna:
2017 Edition. Database. http://dx.doi.org/10.1787/ United Nations Industrial Development Organization.
data-00510-en. Jankowska, A., Nagengast, A. and Perea, J.R., 2012. The
IFOAM (International Federation of Organic Agriculture Product Space and the Middle-Income Trap: Comparing
Movements), 2005. Definition of Organic Agriculture. Asian and Latin American Experiences. OECD Devel-
Available at: www.ifoam.bio/en/organic-landmarks/ opment Centre Working Papers 311. Paris: OECD
definition-organic-agriculture [Accessed September 15, Publishing.
2017]. Japan Statistics Bureau, Ministry of Internal Affairs and
Iizuka, M. and Gebreeyesus, M., 2017. Using Functions of Communications, 2017.Report on the Consumer Price
Innovation Systems to Understand the Successful Emer- Index. Available at: www.stat.go.jp/english/data/
gence of Non-Traditional Agricultural Export Indus- cpi/1588.htm#his [Accessed January 6, 2017].
tries in Developing Countries: Cases from Ethiopia and Jaskula, B.W., 2017. Lithium. Mineral Commodity Sum-
Chile. The European Journal of Development Research, maries, January 2017. Reston, VA: U.S. Geological
29(2), pp. 384–403. Survey.
Ilinri, 2013. All Forcing Agents’ Atmospheric CO2-Equivalent Johnson, R.C., 2014. Five Facts about Value-Added
Concentrations. Available at: https://commons.wikimedia Exports and Implications for Macroeconomics and
235
Trade Research. Journal of Economic Perspectives, 28(2), Kochhar, R., 2015. A Global Middle Class Is More Promise
pp. 119–142. than Reality: From 2001 to 2011, Nearly 700 Million
Jong, H., 2015. Living Standards in a Modernizing World— Step Out of Poverty, but Most Only Barely. LIS Work-
References
A Long-Run Perspective on Material Wellbeing and ing Paper Series 641. Washington, DC: Pew Research
Human Development. In: Global Handbook of Qual- Center.
ity of Life, eds. Glatzer, W., Camfield, L., Møller, V. and Kothandaram, P. and Vishwanathan, V., 2008. Sulabh Inter-
Rojas, M., Dordrecht, Heidelberg, New York, NY and national: A Movement To Liberate Scavengers By Imple-
London: Springer, pp. 45–74. menting A Low-Cost, Safe Sanitation System. Growing
Kabeer, N., 1999. Resources, Agency, Achievements: Reflec- Inclusive Markets. Case Study. New York, NY: United
tions on the Measurement of Women’s Empowerment. Nations Development Programme.
Development and Change, 30(3), pp. 435–464. Krugman, P., 1980. Scale Economies, Product Differentia-
Kabeer, N., 2004. Globalization, Labor Standards, and Wom- tion, and the Pattern of Trade. The American Economic
en’s Rights: Dilemmas of Collective (In)action in an Inter- Review, 70(5), pp. 950–959.
dependent World. Feminist Economics, 10(1), pp. 3–35. Krugman, P., 1989. Differences in Income Elasticities and
Kaldor, N., 1967. Strategic Factors in Economic Development. Trends in Real Exchange Rates. European Economic
Ithaca, NY: New York State School of Industrial and Review, 33(5), pp. 1031–1054.
Labor Relations, Cornell University. Kucera, D. and Tejani, S., 2014. Feminization, Defeminiza-
Kalecki, M., 1955. The Problem of Financing of Economic tion, and Structural Change in Manufacturing. World
Development. Indian Economic Review, 2(3), pp. 1–22. Development, 64, pp. 569–582.
Kaplan, W.A., 2011. Local Production and Access to Medi- Lall, S., 2001. Competitiveness, Technology and Skills. Chel-
cine in Low- and Middle-income Countries: A Literature tenham: Edward Elgar Publishing.
Review and Critical Analysis. Geneva: World Health Laterite, 2016. Export Handbook: Made in Rwanda. Kigali:
Organization. Rwanda Private Sector Federation and TradeMark East
Kaplan, W. and Mathers, C., 2011. The World Medicines Africa.
Situation 2011. Global Health Trends: Global Burden Latouche, S., 2006. Le Pari de la Décroissance. Paris: Fayard.
of Disease and Pharmaceutical Needs. Geneva: World Lavoie, M. and Stockhammer, E., 2013. Wage-Led Growth:
Health Organization. An Equitable Strategy for Economic Recovery, 2013th
Kaplinsky, R., 2006. Revisiting the Revised Terms of Trade: Edition, eds. Lavoie, M. and Stockhammer, E., New
Will China Make a Difference? World Development, York, NY: Palgrave Macmillan.
34(6), pp. 981–995. Lavopa, A. and Szirmai, A., 2012. Industrialization, Employ-
Karuretwa, K., 2016. Manufacturing Our Future: Cases on ment and Poverty. Report prepared for the Interna-
the Future of Manufacturing. Case 14—Rwanda Coffee tional Finance Corporation, November 2012. UNU-
Sector. Geneva: World Economic Forum. MERIT Working Paper 81. Maastricht: United Nations
Kattel, R. and Lember, V., 2010. Public Procurement as an University—Maastricht Economic and Social Research
Industrial Policy Tool: An Option for Developing Coun- Institute on Innovation and Technology.
tries? Journal of Public Procurement, 10(3), pp. 368–404. Lee, J., 2011. The Performance of Industrial Policy: Evidence
Khan, M., 2011. The Economic Development of Bangla- from Korea. International Economic Journal, 25(1),
desh: Identifying Pragmatic Policy Responses. In: Ban pp. 1–27.
gladesh Tomorrow, ed. Ullah, M., Dhaka: Centre for Lee, K. and Malerba, F., 2017. Catch-Up Cycles and
Sustainable Development, pp. 11–68. Changes in Industrial Leadership: Windows of Oppor-
Kim, L., 2001. The Dynamics of Technological Learning in tunity and Responses of Firms and Countries in the
Industrialisation. International Social Science Journal, Evolution of Sectoral Systems. Research Policy, 46(2),
53(168), pp. 297–308. pp. 338–351.
236
Lendle, A., Olarreaga, M., Schropp, S. and Vézina, P.-L., Mayer, J., 2003. The Fallacy of Composition: A Review of the
2016. There Goes Gravity: eBay and the Death of Dis- Literature. UNCTAD Discussion Papers 166. Geneva:
tance. The Economic Journal, 126(591), pp. 406–441. United Nations Conference on Trade and Development.
References
Lenzen, M., Kanemoto, K., Moran, D. and Geschke, A., ———, 2016. Towards a ‘New Normal’ Growth Strategy:
2012. Mapping the Structure of the World Econ- China in Comparative Perspective. Journal of Chinese
omy. Environmental Science and Technology, 46(15), Economic and Business Studies, 14(2), pp. 107–128.
pp. 8374–8381. Mazzanti, M., Marin, G., Gilli, M. and Nicolli, F., 2017. The
Lenzen, M., Moran, D., Kanemoto, K. and Geschke, A., Sustainable Consumption and Production Development
2013. Building Eora: A Global Multi-Region Input– of Manufacturing: Empirical Evidence on CO2 Emissions
Output Database at High Country and Sector Resolu- and Material Use. Background paper prepared for the
tion. Economic Systems Research, 25(1), pp. 20–49. Industrial Development Report 2018. Vienna: United
Leunig, T. and Voth, J., 2011. Spinning Welfare: The Gains Nations Industrial Development Organization.
from Process Innovation in Cotton and Car Production. McMillan, M., Rodrik, D. and Sepulveda, C., 2017. Struc-
CEP Discussion Paper 1050. London: Centre for Eco- tural Change, Fundamentals and Growth: A Framework
nomic Performance. and Case Studies. NBER Working Paper 23378. Cam-
Lewis, P. and Peng, F., 2017. Manufacturing Productivity and bridge, MA: National Bureau of Economic Research.
Real Consumption Wages. Background paper prepared McMillan, M.S. and Rodrik, D., 2011. Globalization, Struc-
for the Industrial Development Report 2018. Vienna: tural Change and Productivity Growth. NBER Working
United Nations Industrial Development Organization. Paper 17143. Cambridge, MA: National Bureau of Eco-
Li, R. and Zhou, T., 2007. Tsinghua Tong fang and the nomic Research.
Chang feng Computer: Innovative Technology and Meadows, D.H., Meadows, D.L., Randers, J. and Behrens
Enlightened Application. New York, NY: United Nations III, W.W., 1972. The Limits to Growth: A Report for the
Development Programme. Club of Rome’s Project on the Predicament of Mankind.
Li, W., Long, R. and Chen, H., 2016. Consumers’ Evalua- New York, NY: Universe Books.
tion of National New Energy Vehicle Policy in China: Mehta, A. and Felipe, J., 2014. Education and the Journey to
An Analysis Based on a Four Paradigm Model. Energy the Core: Path-dependence or Leapfrogging?. ADB Eco-
Policy, 99, pp. 33–41. nomics Working Paper Series 395. Manila: Asian Devel-
Lin, J. and Chang, H.-J., 2009. Should Industrial Policy in opment Bank.
Developing Countries Conform to Comparative Advan- Topten, 2015. Energy Efficiency of White Goods in Europe:
tage or Defy it? A Debate Between Justin Lin and Ha-Joon Monitoring the Market with Sales Data. Zürich: Topten
Chang. Development Policy Review, 27(5), pp. 483–502. International Services.
Los, B., Timmer, M.P. and de Vries, G.J., 2015. How Global Milanovic, B., 2016. Global Inequality: A New Approach for
are Global Value Chains? A New Approach to Measure the Age of Globalization. Cambridge, MA: The Belknap
International Fragmentation. Journal of Regional Sci- Press of Harvard University Press.
ence, 55(1), pp. 66–92. Milberg, W. and Winkler, D., 2013. Outsourcing Econom-
Marro, N., Liu, H. and Yan, Y., 2015. Opportunities and ics: Global Value Chains in Capitalist Development. New
Challenges in China’s Electric Vehicle Market. China York, NY: Cambridge University Press.
Business Review. Available at: www.chinabusinessreview. MINCYT (Ministry of Science, Technology and Produc-
com/opportunities-and-challenges-in-chinas-electric tive Innovation), n.d. Institucional: Antena Tecnológica.
-vehicle-market [Accessed March 23, 2017]. Available at: http://antenatecnologica.mincyt.gob.ar/
Matsuyama, K., 2002. The Rise of Mass Consump- institucional.html [Accessed June 22, 2017].
tion Societies. Journal of Political Economy, 110(5), Ministry of Environment, Korea, n.d. Distribution of Eco-
pp. 1035–1070. friendly Motor Vehicles. Available at: http://eng.me.go.
237
kr/eng/web/index.do?menuId=247 [Accessed Septem- contenidos/proyectos/inp/inpc.aspx [Accessed Octo-
ber 15, 2017]. ber 13, 2017].
Ministry of Women, Dominican Republic, 2010. PLANEG Naudé, W. and Nagler, P., 2015. Industrialisation, Inno-
II: Plan Nacional de Igualdad y Equidad de Género vation, Inclusion. 43. Maastricht: United Nations
References
2007–2017. 2nd Edition. Santo Domingo: Ministry of University—Maastricht Economic and Social Research
Women, Dominican Republic. Institute on Innovation and Technology.
Misra, R. and Singh, D., 2016. An Analysis of Factors Affect- Navigant Consulting, 2014. Energy Savings Forecast of Solid-
ing Growth of Organic Food: Perception of Consumers State Lighting in General Illumination Applications. Pre-
in Delhi-NCR (India). British Food Journal, 118(9), pared for the U.S. Department of Energy Solid-State
pp. 2308–2325. Lighting Program. Washington, DC.
Mitter, S., 2004. Globalization, ICTs, and Economic NDRC (National Development and Reform Commission),
Empowerment: A Feminist Critique. Gender, Technol- People’s Republic of China, 2016. The 13th Five-Year
ogy and Development, 8(1), pp. 5–29. Plan for Economic and Social Development of the Peo-
Mohler, L. and Seitz, M., 2012. The Gains from Variety ple’s Republic of China (2016–2020). Beijing: National
in the European Union. Review of World Economics, Development and Reform Commission, People’s
148(3), pp. 475–500. Republic of China.
Moneta, A. and Stepanova, E., 2017. Characterizing Manu- Nordhaus, W.D. and Yang, Z., 1996. A Regional Dynamic
facturing Engel Curves Around the World. Background General-Equilibrium Model of Alternative Climate-
paper prepared for the Industrial Development Report Change Strategies. The American Economic Review,
2018. Vienna: United Nations Industrial Development 86(4), pp. 741–765.
Organization. Norwegian Ministry of Environment, 1994. Report of the
Moore, F.C. and Diaz, D.B., 2015. Temperature Impacts on Symposium on Sustainable Consumption. Oslo.
Economic Growth Warrant Stringent Mitigation Policy. Nussbaum, M.C., 1992. Human Functioning and Social
Nature Climate Change, 5, pp. 127–131. Justice: In Defense of Aristotelian Essentialism. Political
Murphy, K.M., Shleifer, A. and Vishny, R., 1989. Income Theory, 20(2), pp. 202–246.
Distribution, Market Size, and Industrialization. The Ocampo, J.A., 2005. The Quest for Dynamic Efficiency:
Quarterly Journal of Economics, 104(3), pp. 537–564. Structural Dynamics and Economic Growth in
NAEB (National Agricultural Export Development Board), Developing Countries. In: Beyond Reforms: Struc-
2014. Coffee: Background. Available at: http://naeb.gov. tural Dynamics and Macroeconomic Vulnerability, ed.
rw/index.php?id=48 [Accessed June 19, 2017]. Ocampo, J.A., Palo Alto and Washington, DC: United
———, 2015. Quality, a Must for Rwanda Coffee. Avail- Nations Economic Commission for Latin America and
able at: http://naeb.gov.rw/index.php?id=24&tx_ the Caribbean, Stanford University Press and World
ttnews%5Btt_news%5D=94&cHash=c3f4d204759e Bank.
753089724c0ed0dcd64d [Accessed June 20, 2017]. Ocampo, J.A. and Parra Lancourt, M., 2006. The Commod-
National Bureau of Statistics of China, 2016a. China Statis- ity Terms of Trade and their Strategic Implications for
tical Yearbook 2016. Bejing: China Statistics Press. Development. In: The Long Twentieth Century. Globali-
———, 2016b. China Price Statistical Yearbook 2016. zation Under Hegemony: The Changing World Economy,
Beijing: China Statistics Press. ed. Jomo, K. S., New Delhi: Oxford University Press.
National Geographic and GlobeScan, 2014. Greendex 2014: Ocampo, J.A. and Vos, R., 2008. Structural Change and
Consumer Choice and the Environment—A Worldwide Economic Growth. In: Uneven Economic Development,
Tracking Survey. Washington, DC. eds. Ocampo, J.A. and Vos, R., London: Zed Books.
National Institute of Statistics and Geography of Mexico, OECD (Organization for Economic Co-operation and
2017. Price Indices. Available at: www.inegi.org.mx/est/ Development), 1999. OECD Economic Surveys: Korea
238
1999. Paris: OECD Publishing. http://dx.doi.org/ OECD and World Bank, n.d. Radical and Incremental
10.1787/eco_surveys-kor-1999-en. Innovation. The Innovation Policy Platform. Available
———, 2002. Frascati Manual 2002: Proposed Standard at: www.innovationpolicyplatform.org/content/radical
Practise for Surveys on Research and Experimental Devel-
References
-and-incremental-innovation [Accessed September 18,
opment. The Measurement of Scientific and Technological 2017].
Activities. Paris: OECD Publishing. Offer, A., 2006. The Challenge of Affluence: Self-Control and
———, 2008. Promoting Sustainable Consumption. Well-Being in the United States and Britain Since 1950.
Good Practices in OECD Countries. Paris: OECD Oxford: Oxford University Press.
Publishing. Oqubay, A., 2015. Made in Africa: Industrial Policy in
———, 2011a. Demand-Side Innovation Policies. Paris: Ethiopia. New York, NY: Oxford University Press.
OECD Publishing. http://dx.doi.org/10.1787/ Padilla, E., 2017. Factors Leading to Sustainable Consump-
9789264098886-en. tion (And Barriers to It). Background paper prepared
———, 2011b. ISIC Rev.3 Technology Intensity Definition. for the Industrial Development Report 2018. Vienna:
Paris. United Nations Industrial Development Organization.
———, 2012. Industrial Policy and Territorial Develop- Pain, N., Koske, I. and Sollie, M., 2008. Globalisation and
ment: Lessons from Korea. Overview. Development OECD Consumer Price Inflation. OECD Journal:
Centre Studies Paris: OECD Publishing. http://dx.doi. Economic Studies 2008/1. Paris: OECD Publishing.
org/10.1787/9789264173897-en. http://dx.doi.org/10.1787/eco_studies-v2008-art4-en.
———, 2013. The Role and Measurement of Quality in Com- Palma, J.G., 2008. De-industrialization, ‘Premature’ De-
petition Analysis. Directorate for Financial and Enter- industrialization and the Dutch Disease. In: The New
prise Affairs Competition Committee 17. Paris. Palgrave Dictionary of Economics, eds. Durlauf, S. N.
———, 2014. Greening Household Behaviour: Overview from and Blume, L. E., Basingstoke: Palgrave MacMillan,
the 2011 Survey—Revised Edition. Paris: OECD Publish- pp. 401–410.
ing. http://dx.doi.org/10.1787/9789264214651-en. Pasinetti, L.L., 1981. Structural Change and Economic
———, 2015, Government at a Glance 2015. Paris: Growth: A Theoretical Essay on the Dynamics of the
OECD Publishing. http://dx.doi.org/10.1787/ Wealth of Nations. New York, NY: Cambridge Univer-
gov_glance-2015-en sity Press.
———, 2017a. Environmentally Related Tax Revenue. Envi- Perez, C. and Soete, L., 1988. Catching up in Technology:
ronment Database. Available at: https://stats.oecd. Entry Barriers and Windows of Opportunity. In: Tech-
org/Index.aspx?DataSetCode=ENV_ENVPOLICY nical Change and Economic Theory, eds. Dosi, G., Free-
[Accessed September 15, 2017]. man, C., Nelson, R., Silverberg, G. and Soete, L., Lon-
———, 2017b. Health Spending (Indicator). doi: don: Francis Pinter, pp. 458–479.
10.1787/8643de7e-en. Available at: http://data.oecd. Perman, R., Ma, Y., McGilvray, J. and Common, M.S., 2003.
org/healthres/health-spending.htm [Accessed Septem- Natural Resource and Environmental Economics, Third
ber 14, 2017]. Edition. Essex: Pearson Education Limited.
———, 2017c. OECD Inter-Country Input-Output (ICIO) Petrin, A., 2002. Quantifying the Benefits of New Products:
Tables, 2016 Edition. Available at: www.oecd.org/sti/ The Case of the Minivan. Journal of Political Economy,
ind/inter-country-input-output-tables.htm [Accessed 110(4), pp. 705–729.
September 6, 2017]. Pietrobelli, C. and Puppato, F., 2015. Technology Foresight
OECD and Eurostat, 2005. The Measurement of Scientific and Industrial Strategy in Developing Countries. UNU-
and Technological Activities: Proposed Guidelines for Col- Merit Working Papers 16. Maastricht: United Nations
lecting and Interpreting Innovation Data. Oslo Manual. University—Maastricht Economic and Social Research
Paris: OECD Publishing. Institute on Innovation and Technology.
239
Pingali, P., 2007. Agricultural Mechanization: Adoption Raff, D.M.G. and Trajtenberg, M., 1996. Quality Adjusted
Patterns and Economic Impact. In: Handbook of Agri- Prices for the American Automobile Industry: 1906–
cultural Economics. Agricultural Development: Farmers, 1940. In: The Economics of New Goods, eds. Bresnahan,
Farm Production and Farm Markets, eds. Evenson, R. E.
References
T. F. and Gordon, R. J., Chicago, IL: University of Chi-

and Pingali, P., Elsevier, pp. 2779–2805. cago Press, pp. 71–108.
Plank, L., Rossi, A. and Staritz, C., 2012. Workers and Social Ramani, S.V., SadreGhazi, S. and Duysters, G., 2009. Taking
Upgrading in ‘Fast Fashion’: The Case of the Apparel Innovations to the Poor: Lessons from Sanitation Activists in
Industry in Morocco and Romania. ÖFSE Working India. 7th GLOBELICS International Conference. Dakar.
Paper 33. Vienna: Austrian Research Foundation for ———, 2012. On the Diffusion of Toilets as Bottom of the
International Development. Pyramid Innovation: Lessons from Sanitation Entre-
Plank, L. and Staritz, C., 2016. Social Up- and Downgrad- preneurs. Technological Forecasting and Social Change,
ing of Apparel Workers in Romania: Fast Fashion, Post- 79(4), pp. 676–687.
Socialist Transformation, Europeanization, and the Randall, T., 2016. Here’s How Electric Cars Will Cause the
Global Economic Crisis. Transfer: European Review of Next Oil Crisis. A Shift is Under Way That Will Lead to
Labour and Research, 22(2), pp. 233–248. Widespread Adoption of EVs in the Next Decade. Bloom-
Ponisio, L.C., M’Gonigle, L.K., Mace, K.C., Palomino, J., berg. Available at: www.bloomberg.com/features/2016
de Valpine, P. and Kremen, C., 2015. Diversification -ev-oil-crisis/ [Accessed June 20, 2017].
Practices Reduce Organic to Conventional Yield Gap. Rankin, M., Gálvez Nogales, E., Santacoloma, P., Mhlanga,
Proceedings of the Royal Society B, 282(1799), pp. 1–7. N. and Rizzo, C., 2016. Public-Private Partnerships for
Pontoni, F. and Bruschi, I., 2017. Sustainable Consumption: Agribusiness Development—A Review of International
A Multi-Level Perspective of a Systemic Transition. Back- Experiences. Rome: Food and Agriculture Organization
ground paper prepared for the Industrial Development of the United Nations.
Report 2018. Vienna: United Nations Industrial Devel- Ray, S. and Kanta Ray, P., 2011. Product Innovation for the
opment Organization. People’s Car in an Emerging Economy. Technovation,
Prahalad, C.K., 2006. Fortune at the Bottom of the Pyramid: 31(5–6), pp. 216–227.
Eradicating Poverty Through Profits. Noida: Dorling REVE (Wind Energy and Electric Vehicle Review), 2012.
Kindersley Pvt Ltd. 5,579 Electric Cars Sold in China in 2011. Available at:
Prahalad, C.K. and Hart, S.L., 2002. The Fortune at the www.evwind.es/2012/01/16/5579-electric-cars-sold
Bottom of the Pyramid. strategy+business. Available at: -in-china-in-2011/15911 [Accessed April 13, 2017].
www.strategy-business.com/article/11518?gko=9a4ba Rodrik, D., 2004. Industrial Policy for the Twenty-First
[Accessed March 22, 2017]. Century. KSG Faculty Research Working Paper Series
Prebisch, R., 1950. The Economic Development of Latin RWP04–047. Cambridge, MA: John F. Kennedy
America and Its Principal Problems. Lake Success, NY: School of Government.
United Nations Department of Economic Affairs. ———, 2008. Industrial Policy: Don’t Ask Why, Ask How.
Priem, R.L., Li, S. and Carr, J.C., 2012. Insights and New Middle East Development Journal, Demo Issue, pp. 1–29.
Directions from Demand-Side Approaches to Technology Romer, P.M., 1990. Endogenous Technological Change.
Innovation, Entrepreneurship, and Strategic Management Journal of Political Economy, 98(5), pp. 71–102.
Research. Journal of Management, 38(1), pp. 346–374. Rosenstein-Rodan, P.N., 1943. Problems of Industrialisa-
Radio Formula, 2017. Medicamentos Genéricos en el Mercado tion of Eastern and South-Eastern Europe. The Economic
Aumentaron Del 53 al 84%: Cofepris. En Fórmula Finan- Journal, 53(210/211), pp. 202–211.
ciera. Available at: www.radioformula.com.mx/notas. Rowthorn, R. and Coutts, K., 2004. De-Industrialisation
asp?Idn=689757&idFC=2017 [Accessed September and the Balance of Payments in Advanced Economies.
14, 2017]. Cambridge Journal of Economics, 28(5), pp. 767–790.
240
Santiago Rodríguez, F., 2010. Human Resource Manage- Sen, A., 1990. More Than 100 Million Women Are Miss-
ment Practices and Learning for Innovation in Developing ing. The New York Review of Books. Available at:
Countries: Pharmaceutical Firms in Mexico. Doctoral www.nybooks.com/articles/1990/12/20/more-than
References
Thesis. Maastricht: United Nations University—Maas- -100-million-women-are-missing/ [Accessed August
tricht Economic and Social Research Institute on Inno- 22, 2017].
vation and Technology. Sen, A., 2001. Development as Freedom. New York, NY:
Santiago Rodríguez, F. and Weiss, M., 2017. Demand-driven Oxford University Press.
Policy Interventions to Foster Sustainable and Inclusive Shadlen, K.C. and Massard da Fonseca, E., 2013. Health
Industrial Development in Developing Countries. Back- Policy as Industrial Policy: Brazil in Comparative Per-
ground paper prepared for the Industrial Development spective. Politics and Society, 41(4), pp. 561–587.
Report 2018. Vienna: United Nations Industrial Devel- Shapiro, J.S. and Walker, R., 2015. Why is Pollution from
opment Organization. U.S. Manufacturing Declining? The Roles of Trade, Regu-
Santiago Rodríguez, F., Vértesy, D. and Weiss, M., 2017. lation, Productivity, and Preferences. NBER Working
Manufacturing Development in Catching Up Countries: Paper 20879. Cambridge, MA: National Bureau of Eco-
Locating Demand-Driven Policy Interventions. Back- nomic Research.
ground paper prepared for the Industrial Development Shingrup, S., 2013. Ecolabels: A Green Sustainability
Report 2018. Vienna: United Nations Industrial Devel- Recital in Marketing—An Empirical Framework. Voice
opment Organization. of Research, 2(1), pp. 53–57.
Sapsford, D., 1985. The Statistical Debate on the Net Sidibé, M., Yong, L. and Chan, M., 2014. Commodities
Barter Terms of Trade Between Primary Commodi- for Better Health in Africa—Time to Invest Locally.
ties and Manufactures: A Comment and Some Addi- Bulletin of the World Health Organization, 92(6), p.
tional Evidence. The Economic Journal, 95(379), 387–387A.
pp. 781–788. Singer, H.W., 1950. The Distribution of Gains between
Saviotti, P.P., 2001. Variety, Growth and Demand. Journal of Investing and Borrowing Countries. The American Eco-
Evolutionary Economics, 11(1), pp. 119–142. nomic Review, 40(2), pp. 473–485.
Saviotti, P.P. and Pyka, A., 2004. Economic Development Singh, K., 2016. Business Innovation and Diffusion of Off-
by the Creation of New Sectors. Journal of Evolutionary grid Solar Technologies in India. Energy for Sustainable
Economics, 14(1), pp. 1–35. Development, 30, pp. 1–13.
Saviotti, P.P. and Frenken, K., 2008. Export Variety and the Spraos, J., 1980. The Statistical Debate on the Net Barter
Economic Performance of Countries. Journal of Evolu- Terms of Trade Between Primary Commodies and Man-
tionary Economics, 18(2), pp. 201–218. ufactures. The Economic Journal, 90(357), pp. 107–128.
Saviotti, P.P. and Pyka, A., 2013. The Co-evolution of Inno- Spring, J., 2015. CORRECTED-(OFFICIAL)-UPDATE
vation, Demand and Growth. Economics of Innovation 2-Tesla CEO Says Negotiating with China on Local Pro-
and New Technology, 22(5), pp. 461–482. duction. Reuters. Available at: www.reuters.com/article/
Saviotti, P.P., Pyka, A. and Jun, B., 2016. Education, Struc- tesla-china-idUSL3N12N2RF20151024 [Accessed
tural Change and Economic Development. Structural April 12, 2017].
Change and Economic Dynamics, 38, pp. 55–68. Standing, G., 1989. Global Feminization Through Flexible
Schmitt, J., 2013. Why Does the Minimum Wage have no Dis- Labor. World Development, 17(7), pp. 1077–1095.
cernible Effect on Employment. Washington, DC: Center Statistics South Africa, 2017. Consumer Price Index. Avail-
for Economic and Policy Research. able at: www.statssa.gov.za/?page_id=1854 [Accessed
Schott, P.K., 2004. Across-Product Versus Within-Product January 6, 2017].
Specialization in International Trade. The Quarterly Steckel, R.H. and White, W.J., 2012. Engines of Growth:
Journal of Economics, 119(2), pp. 647–678. Farm Tractors and Twentieth-Century U.S. Economic
241
Welfare. NBER Working Paper 17879. Cambridge, The Economist Intelligence Unit, 2016. Getting Ahead of the
MA: National Bureau of Economic Research. Curve: Growth in Asia’s Emerging Consumer Landscape.
Steenblik, R., 2005. Environmental Goods: A Comparison of London.
the APEC and OECD Lists. OECD Trade and Environ- The Nielsen Company, 2015. The Sustainability Imperative:
References
ment Working Paper 4. Paris: OECD Publishing. New Insights on Consumer Expectations. New York, NY.
Stiglitz, J.E., 2017. Industrial Policy, Learning, and Develop- Available at: www.nielsen.com/content/dam/nielsen
ment. In: The Practice of Industrial Policy: Government– global/dk/docs/global-sustainability-report-oct-2015.
Business Coordination in Africa and East Asia, eds. pdf.
Page, J. and Tarp, F., WIDER Studies in Development The State Council, China, 2016. China to Boost Scientific
Economics. New York, NY: Oxford University Press, and Technological Innovation. Available at: http://
pp. 23–39. english.gov.cn/policies/latest_releases/2016/08/08/
Stiglitz, J.E. and Greenwald, B.C., 2014. Creating a Learning content_281475412096102.htm [Accessed March 29,
Society: A New Approach to Growth, Development, and 2017].
Social Progress. New York, NY: Columbia University Press. ———, 2017. China Punishes 7 Automakers for Green
Stiglitz, J.E., Sen, A. and Fitoussi, J.-P., 2009. Report by Subsidy Breaches. Available at: http://english.gov.
the Commission on the Measurement of Economic cn/state_council/ministries/2017/02/05/content_
Performance and Social Progress. Available at: www. 281475559604412.htm [Accessed March 23, 2017].
communityindicators.net/system/publication_pdfs/9/ Thirlwall, A.P. and Bergevin, J., 1985. Trends, Cycles and
original/Stiglitz_Sen_Fitoussi_2009.pdf ?1323961027 Asymmetries in the Terms of Trade of Primary Com-
[Accessed October 24, 2017]. modities from Developed and Less Developed Coun-
Strachan, G., 2016. The Role of Procurement and Supplier tries. World Development, 13(7), pp. 805–817.
Development in Industrial Policy—A Policy and Pro- Timmer, C.P., 2017. Food Security, Structural Transfor-
gramme Perspective. Presentation at the Global Profes- mation, Markets and Government Policy. Asia and the
sional Programme “The Future of Manufacturing” on Pacific Policy Studies, 4(1), pp. 4–19.
the 17th of October in Chlewiska, Poland. Truett, L.J. and Truett, D.B., 2014. The South Korean Auto
Sturgeon, T.J. and Memedovic, O., 2010. Mapping Global Industry’s Path to Maturity. International Review of Eco-
Value Chains: Intermediate Goods Trade and Structural nomics & Finance, 31, pp. 86–94.
Change in the World Economy. Development Policy UN (United Nations), 2014. Global Sustainable Develop-
and Strategic Research Brand Working Paper 5/2010. ment Report 2015. New York, NY: Department of Eco-
Vienna: United Nations Industrial Development nomic and Social Affairs.
Organization. ———, 2015. National Accounts Statistics: Main Aggregates
Sutton, J. and Trefler, D., 2016. Capabilities, Wealth, and Detailed Tables, 2014. New York, NY: Department
and Trade. Journal of Political Economy, 124(3), of Economic and Social Affairs.
pp. 826–878. UN and WTO (World Trade Organization), 2012. A Prac-
Szirmai, A., Naudé, W. and Alcorta, L., 2013. Introduction tical Guide to Trade Policy Analysis. Geneva: World
and Overview: The Past, Present, and Future of Indus- Trade Organization.
trialization. In: Pathways to Industrialization in the UNCTAD (United Nations Conference on Trade and
Twenty-First Century: New Challenges and Emerging Development), 2013a. Investing in Innovation for
Paradigms, eds. Szirmai, A., Naudé, W. and Alcorta, L., Development. Note by the UNCTAD Secretariat. Trade
New York, NY: Oxford University Press, pp. 3–50. and Development Board—Investment, Enterprise and
Tellis, G.J. and Golder, P.N., 1996. First to Market, First to Development Commission Fifth Session, 29 April–3
Fail? Real Causes of Enduring Market Leadership. Sloan May 2013. Geneva: United Nations Conference on
Management Review, 37(2), pp. 65–75. Trade and Development.
242
———, 2013b. Trade and Development Report, 2013: ———, 2014b. Competitive Industrial Performance Report
Adjusting to the Changing Dynamics of the World Econ- 2014. Inclusive and Sustainable Industrial Development
omy. New York, NY and Geneva: United Nations. Working Paper 12/2004. Vienna.
———, 2014c. Competitive Industrial Performance Report
References
UNDESA (United Nations Department of Economic and
Social Affairs), 2006. World Economic and Social Survey 2012/2013. The Industrial Competitiveness of Nations:
2006: Diverging Growth and Development. New York, Looking Back, Forging Ahead. Vienna.
NY: United Nations. ———, 2015a. Global Value Chains and Development: UNI-
———, 2010. Trends in Sustainable Development: Towards DO’s Support Towards Inclusive and Sustainable Indus-
Sustainable Consumption and Production. New York, trial Development. Vienna.
NY: United Nations. ———, 2015b. Industrial Development Report 2016. The
UNEP (United Nations Environment Programme), 2012. Role of Technology and Innovation in Inclusive and Sus-
Global Outlook on SCP Policies: Taking Action Together. tainable Industrial Development. Vienna.
Paris. ———, 2015c. Meeting Standards, Winning Markets: Trade
———, 2017. 2017 Global Review of Sustainable Public Pro- Standard Compliance 2015. Vienna.
curement. Nairobi. ———, 2015d. White Paper on UNIDO’s GMP Roadmap
UNFCCC (United Nations Framework Convention on Concept. Design of a Stepwise Approach for the Pharma-
Climate Change), 2017. Industrial Energy Efficiency and ceutical Industry in Developing Countries to Comply with
Material Substitution in Carbon-Intensive Sectors: Includ- WHO GMP. Global UNIDO Project: Strengthening
ing Financing, Training, and Co-Benefits Aspects of this the Local Production of Essential Medicines in Devel-
Sector. Prepared for the thematic dialogue on industrial oping Countries Through Advisory and Capacity Build-
energy efficiency organized by the Technology Executive ing Support. Vienna.
Committee on 29 March 2017, Bonn, Germany. Bonn. ———, 2015e. Inclusive and Sustainable Industrial Develop-
UNIDO (United Nations Industrial Development Organi- ment. ISID Operation Platform. Available at: https://
zation), 2002. Industrial Development Report 2002/2003. isid.unido.org/about-isid.html [Accessed September 7,
Competing through Innovation and Learning. Vienna. 2017].
———, 2011a. Industrial Development Report 2011. Indus- ———, 2016. Industrial Statistics 2-Digit Level, ISIC
trial Energy Efficiency for Sustainable Wealth Creation. Revision 3 (INDSTAT2). Database. Available at:
Capturing Environmental, Economic and Social Divi- https://stat.unido.org/database/INDSTAT%202%20
dends. Vienna. 2017,%20ISIC%20Revision%203 [Accessed October
———, 2011b. UNIDO Green Industry: Policies for Support- 7, 2016].
ing Green Industry. Vienna. ———, 2017a. Circular Economy. Vienna.
———, 2012. Pharmaceutical Manufacturing Plan for ———, 2017b. Competitive Industrial Performance Index,
Africa. Business Plan. Prepared as Part of the AUC- 2017 Edition. Database. Available at: https://stat.unido.
UNIDO Partnership. Addis Ababa. org/database/CIP%202017 [Accessed August 7, 2017].
———, 2013. Industrial Development Report 2013. Sustain- ———, 2017c. Competitive Industrial Performance Report
ing Employment Growth: The Role of Manufacturing and 2016. Volume I. Vienna.
Structural Change. Vienna. ———, 2017d. Industrial Statistics 2-Digit Level, ISIC
———, 2014a. Kenya GMP Roadmap. A Stepwise Approach Revision 3 (INDSTAT2). Database. Available at:
for the Pharmaceutical Industry to Attain WHO GMP https://stat.unido.org/database/INDSTAT%202%20
Standards. Global UNIDO Project: Strengthening the 2017,%20ISIC%20Revision%203 [Accessed June 20,
Local Production of Essential Medicines in Developing 2017].
Countries Through Advisory and Capacity Building ———, 2017e. International Yearbook of Industrial Statistics
Support. Vienna. 2017. Cheltenham: Edward Elgar Publishing.
243
———, 2017f. Manufacturing Value Added 2017. Database. VDMA Photovoltaic Equipment, 2016. International Tech-
Available at: https://stat.unido.org/database/MVA%20 nology Roadmap for Photovoltaic (ITRPV): 2015 Results
2017 [Accessed March 5, 2017]. Including Maturity Reports. Frankfurt am Main.
UNSC (United Nations Security Council), 2015. Final
References
Vértesy, D., 2017. Preconditions, Windows of Opportu-

Report of the Group of Experts on the Democratic Republic nity and Innovation Strategies: Successive Leadership
of the Congo. New York, NY. Changes in the Regional Jet Industry. Research Policy,
UNSD (United Nations Statistics Division), 2016a. United 46(2), pp. 388–403.
Nations Commodity Trade Statistics (Comtrade). Data- Warwick, K., 2013. Beyond Industrial Policy: Emerging
base. Available at: http://comtrade. un.org [Accessed Issues and New Trends. OECD Science, Technology and
August 16, 2017]. Industry Policy Papers No. 2. Paris: OECD Publishing.
———, 2016b. United Nations National Accounts Main http://dx.doi.org/10.1787/5k4869clw0xp-en.
Aggregates Database. Available at: https://unstats. WBCSD (World Business Council for Sustainable Devel-
un.org/unsd/snaama/Introduction.asp [Accessed June opment), 2008. Sustainable Consumption Facts and
30, 2017]. Trends: From a Business Perspective. Geneva.
———, 2017. United Nations Commodity Trade Statistics Webb, M., 2007. South Korea: Mass Innovation Comes of
(Comtrade). Database. Available at: http://comtrade. Age. London: Demos.
un.org [Accessed July 30, 2017]. Webb, P. and Block, S., 2012. Support for Agriculture Dur-
———, n.d. a. International Standard Industrial Clas- ing Economic Transformation: Impacts on Poverty
sification of All Economic Activities, Rev. 3. Avail- and Undernutrition. Proceedings of the National Acad-
able at: https://unstats.un.org/unsd/cr/registry/regcst. emy of Sciences of the United States of America, 109(31),
asp?Cl=2 [Accessed August 22, 2017]. pp. 12309–12314.
———, n.d. b. Classification of Individual Consumption Weinstein, D. and Broda, C., 2008. Exporting Deflation?
According to Purpose. Available at: https://unstats. Chinese Exports and Japanese Prices. NBER Working
un.org/unsd/cr/registry/regcst.asp?Cl=5 [Accessed Paper 13942. Cambridge, MA: National Bureau of Eco-
September 25, 2017]. nomic Research.
———, n.d. c. Classification by Broad Economic Catego- WHO (World Health Organization), 2003a. Effective Med-
ries. Available at: https://unstats.un.org/unsd/trade/ icines Regulation: Ensuring Safety, Efficacy and Quality.
classifications/bec.asp#5threv [Accessed September 28, WHO Policy Perspectives on Medicines Geneva.
2017]. ———, 2003b. Substandard and Counterfeit Medicines.
Upadhyaya, S., 2013. Country Grouping in UNIDO Statis- Factsheet 275. Geneva.
tics. Development Policy, Statistics and Research Brand ———, 2011. Survey of the Quality of Selected Antimalarial
Working Paper 1/2013. Vienna: United Nations Indus- Medicines Circulating in Six Countries of Sub-Saharan
trial Development Organization. Africa. Geneva.
U.S. Bureau of Labor Statistics, 2017. BLS Data Viewer. Data- Willer, H. and Lernoud, J., 2017. The World of Organic Agri-
base. Available at: https://beta.bls.gov/dataViewer/view/ culture. Statistics and Emerging Trends 2017. Version
timeseries/CUUR0000SA0 [Accessed January 6, 2017]. 1.3 of February 20, 2017. Bonn: Research Institute of
Usanov, A., de Ridder, M., Auping, W., Lingemann, S., Ter- Organic Agriculture (FiBL), Frick, and IFOAM—
cero Espinoza, L.A., Ericsson, M., Farooki, M., Sievers, Organics International.
H. and Liedtke, M., 2013. Coltan, Congo & Conflict: Woersdorfer, J.S., 2017. The Evolution of Household Tech-
Polinares Case Study. The Hague: The Hague Centre for nology and Consumer Behavior, 1800–2000. Oxon and
Strategic Studies. New York, NY: Routledge.
244
World Bank, 2008. Global Purchasing Power Parities and ———, n.d. b. Country Classifications: A Short History.
Real Expenditures: 2005 International Comparison Pro- Available at: http://go.worldbank.org/U9BK7IA1J0
gram. Washington, DC. [Accessed July 25, 2017].
———, 2012a. World Development Report 2012. Gender World Bank Group, 2016. Benchmarking Public Procure-
References
Equality and Development. Washington, DC. ment 2016: Assessing Public Procurement Systems in 77
———, 2012b. Inclusive Green Growth: The Pathway to Economies. Washington, DC: World Bank. © World
Sustainable Development. Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/
Bank. https://openknowledge.worldbank.org/handle/ 10986/22649 License: CC BY 3.0 IGO.
10986/6058 License: CC BY 3.0 IGO.”. World Economic Forum, 2010. Redesigning Business Value:
———, 2014. Global Consumption Database. Available at: A Roadmap for Sustainable Consumption. Geneva.
http://datatopics.worldbank.org/consumption/. WU (Vienna University of Economics and Business), 2015.
———, 2015. Purchasing Power Parities and Real Size of Global Material Flow Database (www.materialflows.
World Economies: A Comprehensive Report of the 2011 net). Material extraction data, 1980–2013. Vienna.
International Comparison Program. Washington, DC: Wu, J., 2016. LEDinside: LED Lighting Market to Worth
World Bank. License: Creative Commons Attribution USD 33.1B as Market Penetration Rate Hit 52% by
CC BY 3.0 IGO. 2017. LED Inside. Available at: www.ledinside.com/
———, 2016a. The Little Green Data Book 2016. Wash- intelligence/2016/11/ledinside_led_lighting_market_
ington, DC. © World Bank. https://openknowledge. to_worth_usd_33_1b_as_market_penetration_rate_
worldbank.org/handle/10986/24543 License: CC BY hit_52_by_2017 [Accessed September 30, 2017].
3.0 IGO. Yeon, J.-I., Pyka, A. and Kim, T.-Y., 2016. Structural Shift
———, 2016b. World Development Indicators. Database. and Increasing Variety in Korea, 1960–2010: Empirical
Available at: https://data.worldbank.org/data-catalog/ Evidence of the Economic Development Model by the Cre-
world-development-indicators [Accessed January 11, ation of New Sectors. Hohenheim Discussion Papers in
2016]. Business, Economics and Social Sciences 13. Stuttgart:
———, 2017a. The Little Green Data Book 2017. World University of Hohenheim.
Development Indicators. Washington, DC. © World Zhang, X. and Bai, X., 2017. Incentive Policies from 2006 to
Bank. https://openknowledge.worldbank.org/handle/ 2016 and New Energy Vehicle Adoption in 2010–2020
10986/27466 License: CC BY 3.0 IGO. in China. Renewable and Sustainable Energy Reviews,
———, 2017b. World Development Indicators. Database. 70, pp. 24–43.
Available at: https://data.worldbank.org/data-catalog/ Zhang, X., Wang, K., Hao, Y., Fan, J.-L. and Wei, Y.-M., 2013.
world-development-indicators [Accessed January 2, The Impact of Government Policy on Preference for NEVs:
2017]. The Evidence from China. Energy Policy, 61, pp. 382–393.
———, n.d. a. World Integrated Trade Solution. Product Con- Zhao, L., Wang, F. and Zhao, Z., 2016. Trade Liberalization
cordance. Available at: http://wits.worldbank.org/product and Child Labor in China. IZA Discussion Paper Series
_concordance.html [Accessed November 20, 2016]. 10295. Bonn: Institute of Labor Economics.
245
Printed in Austria
November 2017
“The UNIDO Industrial Development Report series is an excellent source of information on

policies and data relating to contemporary industrialisation. The 2018 Report focuses on
demand—both internal and external—and shows the role of manufacturing in providing
consumer goods, foreign exchange and employment. The report shows clearly how
manufacturing continues to be important as countries seek to reorient their economies on
more inclusive and sustainable growth paths. It will interest a wide audience, including
policymakers and academic researchers.”
John Weiss, Emeritus Professor of Development Economics, University of Bradford, UK
“Industrial policy has always been seen as the ultimate supply-side policy. However, using
a sophisticated and multifaceted approach, this report shows how demand-side issues are
crucial in understanding and designing industrial policy. It is a path-breaking contribution
to the debate on industrial policy that should enlighten both policymakers and academics
working on the issue.”
Ha-Joon Chang, University of Cambridge, UK
Sales No. E.18.II.B.48

ISBN 978-92-1-106455-1
eISBN 978-92-1-362857-7
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Vienna International Centre, P.O. Box 300, 1400 Vienna, Austria
Telephone: (+43-1) 26026-0, Fax: (+43-1) 26926-69
E-mail: unido@unido.org, Internet: www.unido.org

Full Report PDF

Uploaded by

Copyright:

Available Formats

Full Report PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Full Report PDF

Uploaded by

Copyright:

Available Formats

Industrial Development Report 2018

Demand for Manufacturing: Driving Inclusive

Demand for Manufacturing: Driving Inclusive

Part A Demand for manufacturing: Driving inclusive and sustainable

27 Chapter 1 Bringing “affordable variety” to all

45 Chapter 2 The virtuous circle of manufacturing consumption

89 Chapter 4 Capturing incomes from global demand for manufacturing

98 Development and impact of manufacturing export prices

113 Chapter 5 Moving towards sustainable manufacturing consumption

Part B Trends in industrial development indicators

179 Chapter 8 The Competitive Industrial Performance index

176 7.23 A declining trend in world manufacturing energy intensity

181 8.1 Definition of indicators

CIP Competitive industrial performance ImWMVA Share of world manufacturing value

OECD Organisation for Economic Organization

Source: UNIDO elaboration.

In a globalized economy the income generated What governments can do

eign demand. help exploit the opportunities created by manufactur-

that manufacturing’s importance has been shrinking Figure 2

Share of manufacturing in total private consumption of households (percent)

turing production has declined relative to other sec-

GDP per capita (constant 2011 PPP$)

a. Industrialized economies b. Developing and emerging industrial economies

Bicycle Passenger car

Note: Industrialization level classification is based on Annex C1, Table C1.2.

Relative price of manufactures

Relative price of manufactures

Deflator, manufacturing industries

Increase in New income

Source: UNIDO elaboration.

Source: UNIDO elaboration.

Domestic demand Globalization has made foreign demand increas-

Least developed countries

Other developing economies, Europe

Least developed countries, Asia and Pacific Emerging industrial economies,

Other developing Emerging industrial economies, Europe

Emerging industrial economies, Americas

Growth in GDP per capita (percent)

Environmental sustainability­—­or lack of it Climate change is a heavy source of long-term

Less environmental Lower costs incurred for

damage incomes for purchase of goods

Augmented Increase in New income

Source: UNIDO elaboration.

role of government Description of intervention Examples of interventions

Bringing “affordable variety” to all

A new perspective: Demand determining consumer welfare. Moreover, the price of

Manufacturing share in total employment (percent)

Bringing “affordable variety” to all

of industrialized and developing economies (see, for Figure 1.3

need for workers per unit of value added produced in 40

manufacturing has declined, as has manufacturing’s

have also translated into lower relative prices when 30

Relative price of manufactures

Relative price of manufactures

Deflator, manufacturing industries

Examining the share of manufacturing using real Figure 1.5

contrary, globally, the share of manufacturing in

If we were to look at real values using 1991 as the

they were decades ago.

Part A Demand for manufacturing: Driving inclusive and sustainable

Environmental sustainability—or lack of it Climate change is a heavy source of long-term