Industrial Development Report 2018

Demand for Manufacturing: Driving Inclusiveand Sustainable Industrial Development
Cecilia Ugaz
Department of Policy Research and Statistics
Tokyo, 18 April 2018

The Industrial Development Report (IDR)• Biannual publication that addresses the most pressing issues ofinclusive and sustainable industrial development facing the world• The report combines UNIDO’s own research with inputs from leading
experts on the field• Each edition has a particular focus. In the past, the focus was mostly
on supply-side issues:
IDR 2011:
Energyefficiency

IDR 2013:
Employmentcreation

IDR 2016:
Technology &innovation

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IDR 2018: Bringing demand into scene• Focus on supply-side relegated important issues- Role of manufacturing in welfare of millions of people by providing new,better and cheaper goods.
- The consumption of manufactured goods (manufacturing demand) - key forthe emergence and expansion of a domestic industrial sector.

• IDR 2018 examines global industrialization from a demand
perspective (consumption of manufactured goods)- Impact of industrial development on our daily life.
- Policy relevance - focus on demand can foster inclusive and sustainableindustrial development (ISID).

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The importance ofindustrial development
for consumers

4Manufacturing produces new, better andmore affordable goods• Industrial development - continuous creation of new goods andimprovement in the quality of existing ones:- Throughout industrial revolutions manufacturing has been a provider of new
goods- Manufactured goods revolutionized human behavior in terms of working,traveling, communicating, entertaining etc.

• New goods typically emerge as luxuries only accessible to richconsumers• At the next stage industrial products become affordable to anincreasingly larger number of households.

5180

160

140

1.1

Aggregate relative priceof manufactured goods
down by 27 percent inlast 25 years

1.00.9120

Deflator, total economy

Relative price ofmanufactures (right axis)

100

80
1991

Deflator, manufacturingindustries
1994

1997

Relative price of manufactures

Implicit gross value added deflator (1991=100)

Manufacturing prices are falling - comparedto overall prices…

0.80.7
2000

2003

2006

2009

2012

Source: UNIDO elaboration based on the Manufacturing Value Added 2017 database.

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a. Industrialized economies

100Household ownership (percent)Household ownership (percent)… and consumer goods are diffusing
massively around the worldRefrigerator
Colour TV
75

MobileTelephone

Washing
Machineb. Developing and emerging industrial economies

100Colour TV75
MobileTelephone

Refrigerator

Personal
Computer

5050

Personal
Computer

Passenger Car

Washing
MachineMicrowave Oven

2525

Passenger Car

Smart Phone
Smart Phone

Microwave Oven
00
1980

1985

1990

1995

2000

2005

2010

2015

1980

1985

1990

1995

2000

2005

2010

2015

Source: UNIDO elaboration based on Euro-monitor International (Economies and Consumers; Possession of Household Durables, 2016).
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Summarizing…
Key Message 1: Industrialization improves our living standards. Itbrings new and better goods that, through time, become affordable for
an increasing number of people.

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The importance ofconsumers forindustrial development

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Industrial development needs demand fordomestic manufactures• New industries can emerge when sufficient demand for theirproducts is in place. Achieving SDG 9 requires demand for domestic
manufacturers.
• Under the right set of conditions, consumption can set in motion avirtuous circle of demand, diversification and industrial development- As incomes grow, demand diversifies away from necessities towards newvarieties and qualities of goods - [variety effect]- New industries gain scale and increase production efficiency. It leads to thedecline of price and massification of consumption - [volume effect]- Further price declines due to competition and innovation increase thepurchasing power of consumers and allow them to diversify theirexpenditures - [price effect]10

A virtuous circle of manufacturingconsumption and industrial development
Augmented
purchasing powerof all consumers

Increase indiscretionary incomePriceeffectDecline in prices ofmassified goods

Competition
and innovation
increase efficiency
further

New income
shifts demand fromnecessities toother goods

Global wages
and profits

VarietyeffectDiversification of
manufacturing demand

VolumeeffectMassification of
manufacturing demand

Consolidation ofindustry increases
production efficiency

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Importance of domestic demand forindustrial development• Domestic absorption is a key driver ofincome generation along the virtuous
circle:- Domestic absorption accounts for the largest
share of final demand across the world.
- As countries industrialize, the importance ofdomestic absorption declines• To benefit from domestic demand,countries need to:- Improve their income distribution;- Strengthen real wages; and- Build industrial capabilities

Changing trends in the relative importance of domestic
absorption of manufacturing goods
Share of domestic absorption in final demand for manufacturing goods• Demand can originate from internalsources (domestic absorption) or
external sources (exports)

100
Least developed
countries
Other developing
economies

90

Emerging industrial
economies

World

80

70

Industrialized
economies

60
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: de Macedo and Lavopa (2017) based on the Eora Multi-Region
Input-Output database.
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Importance of external demand for industrial
development• Serving external demand creates incomes for local
producers and fuels the virtuous circle• It also provides foreign exchange to import goods andavoid balance of payment tensions• The extent to which these opportunities materialize
depend on the purchasing power of exports.
• To benefit from external demand, countries need to:- Upgrade the technology content and quality of exports;- Diversify export destinations and enter into markets with higherincomes.
13Summarizing…
Key Message 2: Consumption is a key driver of industrial development.
Under the right set of conditions it set in motion a virtuous circle ofdemand diversification, income creation and inclusive industrialization(SDG 9).

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Moving towards
sustainable manufacturingconsumption

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Income creation vs. pressures onenvironment
Global biocapacity went into the red nearly half a century• Higher demand requires the use of
more natural resources and carbon
energy; causes increase in CO2emission and residuals.
• If all countries replicate theconsumption pattern observed today
in the world, environmental
sustainability would be at risk

Global hectares per person• Consumption leads towards avirtuous circle, but this circle is notnecessarily environmentallysustainable.

ago

4

EcologicalReserve
3

Ecologicalfootprint

Ecological Deficit
2

Biocapacity10
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Source: Global Footprint Network National Footprint Accounts, 2017
Edition.
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Sustainability requires a shift in consumption
patterns towards “environmental goods”
Export share of environmental goods on the risei. have a lower environmental
impact in the production process
ii. do not pose a threat in terms ofwaste disposaliii. require lower use of materials• Development of markets for thesegoods can help creating a sustainablevirtuous circle of manufacturingconsumption• However, the market forenvironmental goods is still niche:- It has been growing in all countries…
- but represents less than 8% of world exports

Average share of enviornmental goods in total exports (percent)• Environmental goods:
10

87.3
World
6High-income
economies
42

Middle- and lowincome
economies

01988

1991

1994

19972001

2004

2012

Source: UNIDO elaboration based on the United Nations Comtrade
database
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Summarizing…
Key Message 3: The impact on environment from massification ofconsumption can be reduced through the technological innovation anddevelopment of environmental goods. Shifting consumption patterns
towards environmental goods is key to render the virtuous circle
sustainable.

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Demand-driven
industrial policies
to foster ISID

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Scope of government action• Changes in demand offer opportunities for industrialization and thegeneration of new incomes and welfare• Demand can be either a framework condition partially or completely
outside the control of policy makers, or a variable that is actionablethrough public policy• IDR 2018 proposes different policy interventions for both cases

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Policies to capture income from demand,when demand is given• Government as a facilitator- Facilitate removal of market failures and build on current comparativeadvantages to tackle emerging demand opportunities for industrialization.

• Government as technological capacity building partner- Promote the building of technological and productive capabilities to enter
sectors that it would otherwise be impossible to develop given traditional
comparative advantages.

• Government as a market antenna- Develop capacities and adopt measures to help domestic agents identify oranticipate changes in demand for manufacturing products.

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Policies to shift demand towards specificgoals• Environment-friendly policy• National industrial policies could steer the demand of environment-friendly
goods (e.g. carbon prices policies and regulation).

• Regulation towards consumption• Stimulate and regulate consumption of manufacturing products or influence
consumer behavior through changes in relative prices.

• Partnership with the private sector• Promote/enhance/create demand for innovative products by targeting final
users; disseminate knowledge and information on market opportunities.

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Summarizing…
Key Message 4: Demand considerations broaden the scope ofgovernment action to address broad economic and inclusive andsustainable industrial development outcomes.

23Thank you
Kindly send your comment toidr2018@unido.org

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