EQuIP

Enhancing the Quality of Industrial Policies

Conceptual Framework

Conceptual Framework
Motivation and Background for the EQuIP Toolbox
This document has been produced without formal United Nations editing. The
designations employed and the presentation of the material in this document
do not imply the expression of any opinion whatsoever on the part of the
Secretariat of the United Nations Industrial Development Organization (UNIDO)
concerning the legal status of any country, territory, city or area or of its
authorities, or concerning the delimitation of its frontiers or boundaries, or its
economic system or degree of development. Designations such as “developed”,
“industrialized” and “developing” are intended for statistical convenience
and do not necessarily express a judgment about the stage reached by a
particular country or area in the development process. Mention of firm names
or commercial products does not constitute an endorsement by UNIDO.
Conceptual Framework

Motivation and Background

for the EQuIP Toolbox
Contents
1. Introduction 1

2. Industrial Development and Growth  4

3. Industrial Employment Generation and Poverty Alleviation 8

4. Sustainable Industrial Development 11

5. Industrial Capabilities and Framework Conditions 13

6. EQuIP and Evidence-Based Industrial Policy-Making 15

4
1. Introduction
Industrial development was once considered the central engine of growth and development and
this was reflected in the usage of the term industrialised to denote high-income countries. During
the 1950s and 1960s, governments therefore took an active role in their economies’ development
by supporting and protecting strategic industries or, in other words, by using industrial policy.
Many economies developed rapidly on the basis of active government deployment of industrial
policy (notably in East Asian countries), but others were not as successful. The 1980s, however,
saw a change in the international development paradigm towards a free-market-oriented, or
“laissez-faire”, approach. The “Washington Consensus”, which rose to ascendance during

Introduction
that time, argued that developing country governments should take a “hands-off ” approach
to development and through processes of deregulation, liberalisation and privatisation allow
for the market to identify and refine their country’s “comparative advantage” in production and
trade. Comparative advantage, however, is a static concept which suggests that a country should
specialise in what it is best situated to produce according to its factor endowments. In line with
this logic, a country that is abundantly endowed with natural resources should specialise in
the production and export of raw materials and resource-based goods. While this may help the
country become highly efficient at producing resource-based goods, it provides little guidance on
how it could move into producing goods that are not resource-based, e.g. high-tech products. This
process of economic transformation and movement into new, more complex activities requires
industrial policy.

In recent years, the global financial crisis, slow growth or even stagnation in high-income countries,
and an increasing number of development failures in lower-income countries have triggered a
revived commitment to industrial policy both in developed and developing countries. Tilman
Altenburg succinctly articulates this phenomenon in saying:

industrial policy is back on the agenda. it is now widely accepted that those
countries which managed to catch up with the old industrialised, high income
countries are the ones whose governments proactively promoted structural
change, encouraging the search for new business models and channelling
resources into promising and socially desirable new activities.1

What is powerful about this particular statement is that it frames industrial policy as the
government actively promoting those economic activities which it sees as being socially beneficial,
for one reason or another, and thereby acknowledges the infinite number of motivations that a
country might have for supporting particular economic activities, depending upon their current
context and ultimate objectives. Moreover, this definition leaves our minds open to recognise the
important trade-offs which might exist among different goals. There are, for example, very valid
reasons for a government to support specialisation in certain economic sectors or activities in
order to establish or maintain international competitiveness, but there are equally valid reasons
to support a more diversified manufacturing sector so as to ensure strong linkages across sectors
and greater economic resiliency. Equally, there are very good reasons for an economy to move
into highly sophisticated activities with higher entry barriers and value addition but, especially
in a developing country context, there are also reasons to promote labour-intensive sectors that
can provide jobs for your citizens and contribute to poverty alleviation. in the words of Sanjaya
Lall2, “clearly there are not only ‘many roads to heaven’ but also many heavens”. What defines a

1 Altenburg, T. (2011), Industrial Policy in Developing Countries. Overview and lessons from seven country cases,
DIE Discussion Paper 4/2011, Bonn: German Development institute (DiE)
2 Lall, S. (2000),Selective Industrial and Trade Policies in Developing Countries: Theoretical and Empirical Issues,
Working Paper No. 48. Queen Elizabeth House, University of Oxford

1
 given country’s “heaven” and the proposed route to get there will fundamentally depend upon
each country’s unique context, priorities and objectives. Therefore, while developing countries
require industrialisation in order to propel their economies beyond resource-based production
and low-productivity services, the shape and form of their industrial strategies will be contingent
upon their current conditions and performance and their vision for the future.

Low-income countries face unique challenges and opportunities in the contemporary world. Like
never before, countries are subjected to highly competitive world markets. Due to decades of
far-reaching and widespread liberalisation, it can be hard for lower-income countries to successfully
initiate a process of structural change (i.e. to move from an economic structure dominated by
simple agrarian activities to one with more complex economic activities). Efforts to build up a
Conceptual Framework

manufacturing sector have become much more difficult for developing countries because they
are strongly exposed to competition from countries that have already developed sophisticated
industrial capabilities based on cutting edge technologies and that have achieved economies of
scale. In a globalised world economy, developing country producers are increasingly competing
with foreign manufacturers in both domestic and international markets but often lack the (time
and opportunity to develop the) capabilities to be competitive in either cost or quality.

On the other hand, lower-income countries have a unique opportunity to learn from past
industrialisation successes and failures and to develop an economic system that generally serves
the needs of their current and future populations. We live in an age of unprecedented information.
Through a solid analysis and understanding of their current industrial performance and the
performance of others, developing countries have the opportunity to design evidence-based
industrial strategies to ensure more effective and adaptive policy interventions. Countries can
learn from role models (i.e. successful industrialisers) and examine the power of the manufacturing
sector to spur structural transformations. While economic growth often features among the
main development objectives of lower-income countries (which is reasonable given low levels
of economic output and material need fulfilment), recent history has shown the devastating
consequences of following a narrow-minded “growth first, everything else after” approach. Many
countries have experienced fast economic growth but without production transformation and
alongside persistent poverty, rising inequality and high levels of social dislocation and conflict.
Other countries have pursued growth with such reckless abandon that they have exhausted
the natural resources required for that growth. Today, however, lower-income countries are in a
position to learn from past development failures and to pursue innovative new industrial strategies
to ensure a more sustainable and socially inclusive development trajectory that maximises the
positive effects of industrialisation while minimising its negative effects.

The notions of inclusiveness and sustainability largely represent a reaction by the international
community to past development failures but what do these terms really mean? And how do they
relate to industrial development? Broadly speaking, inclusive growth can be understood as
process whereby large segments of a country’s population are able to participate in and benefi’t
from economic growth. The most common definition of sustainable development is a growth
trajectory which fulfils the needs of the present population without compromising the ability of
future generations to meet their needs. For lower income countries the notion of inclusive and
sustainable growth therefore points to two key objectives: The first is the overriding, supreme,
importance of broad-based need fulfi’lment (e.g. poverty alleviation), through active participation
in the economy. The other is the importance of taking a longer-term perspective and recognising
the need for an economic structure that is resilient and respects the limits of the ecosystem, so
that growth today does not come at the expense of prosperity tomorrow.

2
A simple definition of inclusive and sustainable industrial development would therefore be the
development of an industrial structure that contributes to widespread needs fulfilment without
undermining future generations’ ability to meet their needs. With the core objectives of growth
and poverty alleviation, we will first want to understand how industrialisation contributes to
economic growth. However, history has shown that while growth may be necessary, it is certainly
not a sufficient condition for poverty alleviation and active economic participation. Therefore, we
need to explore how industrialisation can contribute to inclusive growth. Finally, we will want
to examine how we can learn from past environmental and economic failures, and promote an
industrialisation trajectory that is resilient and does not undermine future generation’s ability to
utilise the raw materials and eco-system required for such a transformative economic process.

Introduction
At the same time, it is important to acknowledge that there may be significant trade-offs between the
different dimensions of inclusive and sustainable industrial development. That is, achievements in
one area might come at the expense of achievements in other areas and it is very unlikely that all
industrial policy objectives can be achieved simultaneously. However, it is not possible to discuss
and explore all of these trade-offs in great detail in this conceptual framework document. Rather,
this document focuses on shedding light on possible synergies between different objectives in the
context of inclusive and sustainable industrial development.

This conceptual discussion will lay the foundations and serve as a point of reference for the
EQuiP toolbox. The development landscape has fundamentally changed since the last time
industrial policy had its heyday and we need new tools to reflect these realities. Developing
country governments can choose among a plethora of methodologies and foreign consultancies
that promote traditional approaches to industrialization, emphasizing principles of industrial
upgrading and export competitiveness. Whilst these topics are also covered in the EQuiP toolbox,
the EQuiP approach is based on the objective to balance out purely economic considerations and
to present a more holistic picture of industrialization and how it can contribute to contemporary
development objectives. Our hope is that through measuring and monitoring some of the core
mechanisms for a more inclusive and sustainable industrial development process (e.g. with the
help of the EQuiP methodological toolbox), developing countries will be in a position to critically
assess what they want to achieve through industrial policies and to pioneer new “blueprints” for
the better world they envision.

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 2. Industrial Development and Growth
When we speak about inclusive and sustainable industrial development for lower-income countries,
we must first start with a serious recognition of poverty, of a lack of needs fulfilment, which
affects a large segment of these countries’ populations due to insufficient resources. Spurring
economic growth, i.e. the expansion of incomes but also of economic output in the form of an
increasing supply of goods and services, is therefore a fundamental policy objective in situations
of widespread poverty, as this is the process through which the “economic pie” is enlarged and
sufficient incomes are generated to meet the population’s basic needs. Our first task is therefore
to understand how industrialisation contributes to economic growth – and EQuiP tool 1 presents a
Conceptual Framework

methodology for analysing and monitoring this.

At the very heart of development is the need for structural change, i.e. transformations in the
country’s economic configuration that are conducive to economic growth and poverty alleviation,
whereby, broadly speaking, populations move out of subsistence farming and informal services
into more productive activities with higher value addition. Indeed, evidence shows that no country
has been able to achieve significant income growth and poverty alleviation without structural
transformations and economic diversification. In order to ensure basic needs fulfilment an economy
needs to provide adequate incomes and a variety of products for their population. The growth and
expansion of the manufacturing sector plays a critical role in this development process.3

In broad terms, manufacturing can be defined as the transformation of raw materials into final
goods. Manufacturing is therefore something akin to alchemy whereby human ingenuity allows
for the creation of a product which is fundamentally different and worth more than its individual
parts. We can think about the classic example of Adam Smith’s pin factory. A pin is simply a
sharpened and refined piece of metal that can be used to hold cloth in place. Historically, we have
seen incredible progress in terms of the process with which pins are produced. We have gone
from having a single metal smith making pins, to developing factories where each individual is
responsible for executing one specific task in the production process (e.g. division of labour),
to now having large machines that can efficiently produce millions of pins in a day. This process
represents technological change and productivity enhancement in an economy and is commonly
considered by economists to be a core driver of growth.

Beginning with the industrial revolution, the manufacturing sector has been the main site of
technological innovation and productivity gains in an economy, due to its unique ability to exploit
economies of scale and harness the power of “learning-by-doing”. The example above shows the
power of “economies of scale” as the ability of one metal smith to produce pins (e.g. output) is
fundamentally lower than that of a factory where a number of people work. Furthermore, the
“learning-by-doing” is reflected in the ability of people to specialise and become highly efficient
in one part of the production process, e.g. the sharpening, elongating, pin head placement, etc.
These transformative processes increase the productivity of firms, which incites a larger structural
transformation in the economy. Through more innovative production processes there is a “creative
destruction” of less productive firms who are outcompeted by more productive ones, resulting in
higher overall productivity in the economy. This dynamic process of productivity enhancement, which
translates into greater output, in an economy is commonly seen as a main driver of economic growth.

It is due to these unique dynamics that many authors have cited the manufacturing sector as the
core engine of economic growth. Since the 1960s, evidence has supported the “Kaldor Laws”4
concerning the macroeconomic impacts of industrial expansion:

3 See, for example: UNIDO (2009), Industrial Development Report 2009, Vienna: UNIDO
4 See Kaldor, N. (i978[i966]), Causes of the Slow Rate of Economic Growth in the United Kingdom, in: Kaldor, N.,
Further Essays on Economic Theory, New York: Holmes & Meier.

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 1. The faster the growth rate of manufacturing output, the faster the growth rate of the
overall output of an economy as measured through its gross domestic product (GDP);

2. The faster the growth rate of manufacturing output, the faster the growth rate of
manufacturing labour productivity (due to increasing returns);

3. The faster the growth rate of manufacturing output, the faster the growth rate of
non-manufacturing labour productivity (due to reallocation of labour).

Historically, industrialisation has been very important for growth and development, not only
because of the productivity dynamics occurring within the manufacturing sector but also due to
the positive spill-over effects it has on the rest of the economy. Due to the complex nature of

Industrial Development and Growth

manufacturing, it has traditionally had strong consumption and production linkages with other
sectors, which result in a positive, re-enforcing and cumulative process of structural transformation
and development.

The production linkage reflects the fact that manufacturing requires a myriad of different goods
and services from other sectors of the economy to create their final good, which means that, as
manufacturing expands, the demand for and investments by input suppliers increase. Furthermore,
manufactured goods are also required as inputs for a variety of activities in the economy so
improvements in price or quality will have positive implications for those activities. We can think
of the example of steel production which has strong forward and backward linkages. As steel |
production expands, demand for iron ore and coal increases, reflecting backward linkages. At the
same time, steel also has a strong potential for forward linkages as increased access to steel in a
country can encourage the growth of automotive, construction and other sub-sectors that require
steel as input for their own production. We must also not forget that machinery is a product of
the manufacturing sector and the productivity increases, which come from the introduction of a
tractor or similar equipment in subsistence farming communities, can be astronomical, thereby
illustrating the positive spill-over potential originating from manufacturing’s production linkages.
The consumption linkage relates to these spill-over dynamics but focuses less on the direct
materials being used and more on the incomes generated from these linkages. Since the
manufacturing sector tends to have higher labour productivity than other sectors in developing
economies, the incomes earned from manufacturing employment can be re-spent on locally
produced goods and services, thus boosting demand for other domestic economic activities. if the
textile industry grows, for example, this will increase demand for cotton, which - if sourced locally
– will lead to higher incomes for cotton farmers, ultimately resulting in increased demand for
goods and services in the countryside. Similarly, an expansion of manufacturing typically leads to
an increase in demand for services such as fi’nance, telecommunication, transportation, logistics,
etc. The manufacturing sector is therefore unique as a locus of productivity enhancement and as
a driver of aggregate demand and broad-based sectoral growth in an economy. These processes,
however, are largely determined by the domestic structure of industry and how well embedded it
is in the national economy.

Diversification and Resiliency, Upgrading and Industrial Exports

Above we have already pointed out why diversification of a country’s economy, in general, is
likely to be beneficial in terms of generating or strengthening linkages across sectors, improving
resilience of the economic system, and boosting its innovative capacity through cross-fertilisation.
Moreover, we have also seen why, more narrowly, a more diversified manufacturing sector is
also desirable. The more manufacturing activities occur in a society, the more likely it benefits
from positive spill-over effects to the rest of the economy (e.g. employment, technology and
productivity spill-overs). it is also likely to be less vulnerable to, or less severely affected by,
adverse developments (“shocks”) (see also EQuiP tool 4).

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 Furthermore, we have seen how the development of a manufacturing sector is vital to ensure a
structural transformation of the economy out of agriculture and into industry (which is commonly
referred to as “first-tier structural change”). if this process is successful it means that the economy
as a whole has already become more diversified (e.g. it is engaged in more activities than it was
before). However, in practice, a pervasive problem in many lower-income countries today is still
the reliance on simple productive activities (manufacturing or non-manufacturing) which generate
little value-added and positive externality to the rest of the society. Unsophisticated products
often leave the economy highly vulnerable to external shocks in weather, commodity prices, and
fierce foreign competition due to their low barriers to entry. Moreover, the terms of trade for simple
commodities tend to decline over time, that is, it will often take more and more exports of simple
products to be able to import the current amount of complex goods.
Conceptual Framework

At a certain stage, successful industrial development, thus, also involves the upgrading of
productive structures towards more attractive activities. At the level of the manufacturing sector
as a whole, upgrading entails a gradual shift towards producing and exporting goods with higher
technological content (a process which is also known as “industrial deepening” or “second-tier
structural change”). Higher-technology goods tend to have higher entry barriers (implying less
exposure to competition and higher rents) and less vulnerability to price shocks as compared to
simple commodities. Further, externalities and rents are not associated with all goods equally,
and structural transformation towards more complex production can generate strong linkages and
positive externalities (i.e. knowledge spill-overs) that benefit the whole society (see EQuiP tool 3).

These advantages of diversification notwithstanding, there are, however, also benefits of

specialising in particular manufacturing activities, particularly in the context of highly competitive
global markets. EQuiP tool 2 presents methodologies that allow for an assessment of the productive
capacities and competitive performance of individual manufacturing sub-sectors (such as the food
and beverages, textiles and clothing, or transport equipment sub-sectors, for example). Promoting
specialisation can help boost international competitiveness and export expansion. Exports are
often taken as an indicator of the international competitiveness of a country’s industrial sector
or certain sub-sectors. in a sense, a country’s export portfolio also reflects its achievements in
terms of structural change: a higher share of manufactured goods in total exports indicates that
agricultural and resource-based exports have become relatively less important; if the country’s
export basket is even shifting towards higher-technology products, this can signal further
achievements in transforming its economic structure towards more sophisticated, higher-value
activities (see EQuiP tools 1 and 3).

More generally, participation in international trade through exporting and importing potentially
brings certain benefits to developing countries. At the most general level, it allows them to benefit
from the international division of labour. Since it is difficult for a single country to produce all
necessary (or demanded) goods itself, or at least to do so in the most efficient (competitive) way,
there are certain benefits from engaging in cross-border exchanges of goods and services (the
so-called “gains from trade”). in this context, exports earn foreign currency which, in turn, can be
used to import goods that are produced more efficiently elsewhere.

Moreover, exporting can help producers to yield economies of scale. in fact, the limited size of
the domestic market is often a constraint for producers in developing countries whereby market
size refers not only to the number of potential customers but also to their purchasing power.
Exporting, on the other hand, means reaching out to international markets, i.e. a much larger pool
of potential foreign customers. By tapping into foreign demand, which is often characterised by
higher purchasing power, exports can be an additional source of economic growth.

in this context, the manufacturing sector plays a particularly important role given that
manufactured products account for over 60% of global trade. Therefore, specialising in order to

6
compete in global markets on the basis of cost or quality can be an important way to gain foreign
currencies. Especially for small developing states, foreign exchange will be necessary to enable
them to import those intermediate and capital goods needed as inputs for local production as
well as some of the consumer goods necessary to ensure the material needs fulfilment of their
populations. These important balance-of-payment issues can be resolved either through exports
or through import substitution, which would minimise the dependence on foreign imports.

Besides these potential benefits in terms of overcoming the limits of small domestic markets and
earning foreign exchange, exports possibly also offer learning opportunities that can accelerate
productivity growth. Exporting to foreign customers who are demanding in terms of quality,
consistency and reliability of supply (or at least more demanding than domestic customers) can

Conceptual Framework
urge or force producers to enhance efficiency and improve the quality of products and operations.
Selling to international markets can, therefore, be instrumental in promoting technological
upgrading through “learning by exporting” effects.

However, exporting is not an easy task, not least since competition on international markets has
intensified dramatically in the past few decades as a result of globalisation and trade liberalisation.
Moreover, the production of goods and services, and of manufacturing goods in particular, has
increasingly been fragmented internationally in recent years. That is, the different stages of
producing a certain good are now increasingly being carried out in different locations across
the world within global value chains (GVCs) which are governed by multinational corporations
and lead firms that outsource and offshore production processes and tasks (see EQuiP tool 7).
Specialisation today is, therefore, more and more about specialising in certain tasks or production
stages rather than in final products or entire sectors.

While in some cases participation in GVCs allows developing countries to enter new markets,
new business relationships and the production of (e.g. manufacturing) products that are more
sophisticated than the goods they typically produce, there are also the risks of being locked in a ^
specialisation pattern based on low-value activities and of the emergence of enclave economies. â
Such enclave economies typically have hardly any linkages to the rest of the country’s productive
system and, consequently, generate little local value added, therefore contributing only modestly
to economic growth. Meanwhile, if specialisation takes the form of an export basket that is highly
concentrated on a few export products and/or export markets, this makes the country quite
vulnerable to external shocks (such as abrupt drops in world market prices or in foreign demand
from key export markets). From an economic development and sustainability perspective, the
benefits of such “enclave” economies and (over)specialisation (or concentration) on a small set of
economic activities, export products and/or export markets are therefore questionable.

There are, as we have seen, numerous benefits of a diversified industrial structure that is embedded
within the domestic economy. However, today’s world is characterised by a highly integrated
global economic context and therefore the objective of developing a resilient and sustainable
industrial sector will need to be balanced with considerations on international competitiveness.
For, in a globalised economy, competition does not only intensify in international markets but
also in domestic markets, even if the country in question does not pursue an export-oriented but
rather an inward-looking economic development strategy aimed at diversification and catering to
local demand. in today’s globalised economy, it is more difficult to shield domestic producers from
foreign competitors so that there is always the risk that foreign producers supply products that
are also produced domestically in better quality or at a lower cost, ultimately outcompeting and
crowding out local industry (thereby undermining its sustainability). A balanced approach is, thus,
required so that the industrial sector becomes neither too isolated nor too exposed to risks such
as foreign competition or external shocks, thereby avoiding the repetition of historical mistakes.

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 3. Industrial Employment Generation
and Poverty Alleviation
For lower-income countries, economic growth (which goes beyond the industrial sector) is
necessarily a core objective but recent history has illustrated that economic policies that focus
purely on maximising the pace of growth can have poor social consequences. What is equally or
even more important is the pattern of growth – which has to do with the processes of structural
change and productive transformation described above. Many countries (both rich and poor alike)
who have followed a “growth first” approach have ended up with highly volatile, inequitable and
Conceptual Framework

employment-deprived development trajectories. Broadly, economic growth can be said to be

inclusive when large shares of the population are able to participate in and benefit from the growth
process. This idea is particularly vital when we speak of low-income countries as the conventional
“growth, tax, spend” approach to poverty alleviation and socio-economic development, which is
based on the premise that economic growth will generate tax income for the government which it
then can use for income redistribution through social policy and welfare spending, is particularly
inappropriate and unlikely in these situations.

With a mind towards these realities, an inclusive growth approach takes a longer-term perspective
and focuses on broad-based productive employment generation as opposed to redistribution
as the key mechanism to ensure broad-based needs fulfilment. it is now a widely accepted fact
that in low-income countries, productive employment is the core engine of poverty alleviation
(see EQuiP tool 5). For most impoverished citizens, their labour is the only asset they can use to
improve their standard of living. Hence, the generation of productive employment opportunities
for the underemployed and working poor is critical to achieving broad-based poverty reduction
and inclusive economic and social development.5

When speaking of inclusive growth, lanchovichina and Lundstrom argue:

“A rapid pace of growth is unquestionably necessary for substantial poverty

reduction, but for this growth to be sustainable in the long-run, it should be
broad-based across sectors and inclusive of the large part of the country’s labour
force. This defi’nition of growth implies a direct link between the macro and
micro determinants of growth. The micro dimension captures the importance
of structural transformation for economic diversification and competition,
including the creative destruction of jobs and firms”6 (emphasis added).

Having recognised the importance of both economic growth and inclusiveness as development
objectives, the question is how the manufacturing sector can contribute to achieving them. Above
it was discussed how the manufacturing sector can act as an engine for growth. Meanwhile, history
has shown that industrialisation and productive transformation also importantly contribute to
productive employment generation - both directly (i.e. through manufacturing jobs) and indirectly
(i.e. through creating jobs in other sectors of the economy).7

5 See, for example: UNIDO (2013), Industrial Development Report 2013, Vienna: UNIDO
6 lanchovichina, E. and Lundstrom, S. (2009), Inclusive Growth Analytics: Framework And Application, World Bank
Policy Research Working Paper No. 4851, Washington DC: World Bank
7 International Labour Organization (ILO) (2014), World at Work Report 2014. Developing with Jobs, Geneva: iLO.

8
That is, the expansion of the manufacturing sector plays a vital role in such a process of (more)
inclusive growth as it incites structural change within an economy whereby employment
opportunities with rising productivity are generated. However, this process is not automatic,
as some of the most extreme cases of “jobless growth” we have seen in recent decades have
demonstrated in countries with highly competitive manufacturing sectors (e.g. the experience of
“jobless growth” in different Asian economies8). This phenomenon can occur because growth is
concentrated in sectors that are not accessible to poor workers or because the labour intensity
of growth is very low. That is, it can be the result of a limited labour absorption capacity of the
manufacturing sector and/or of limited indirect job generation effects of industrial growth.

Direct employment generation from industrialisation is particularly important for low-income

Industrial Employment Generation and Poverty Alleviation

countries where the majority of the population is typically still engaged in subsistence farming and
informal services. The low productivity of these activities translates into low earnings and thus low
standards of living. Labour-intensive industrialisation therefore plays an important role in poverty
alleviation through the direct absorption of the unemployed, underemployed and working poor
into more productive activities. Moreover, labour-intensive industries tend to have lower entry
barriers for low-skilled workers and are therefore more likely to be accessible to poor populations.

However, an important caveat has to be highlighted: While labour-intensive industries absorb more
labour, they might also offer limited scope for technological innovation, upgrading, economies of
scale and, ultimately, productivity enhancements. This is an important possible trade-off to be
recognised and taken into account by policy-makers.

In any case, the ability for lower-skilled workers to access higher-waged employment in the
manufacturing sector has historically also contributed to more equitable growth. Dani Rodrik,
for example, argues that the manufacturing sector is where the middle class forms and expands
because it can provide higher-waged jobs for lower-skilled workers, thus propelling them into
middle-class status which is vital not only for the social cohesion within a country but also in
terms of contributing to aggregate demand in an economy (e.g. the consumer linkage outlined
above).9 The stimulus of aggregate demand is very important for lower-income countries as this iâ
is the mechanism through which broad-based sectoral growth and income generation occurs. At
initial stages, increased incomes will lead to higher demand for agricultural products, which will
help to alleviate poverty for those working in rural agriculture. As incomes continue to rise, it will
lead to demand for manufactured products and other goods and services in the economy, which
will incite a process of mutually re-enforcing expenditures and investments. it is for this reason
that higher-wage employment opportunities in labour-intensive sectors are so important.

However, while some strands of economic theory would predict the direct translation of productivity
into higher wages, history has shown that without strong institutional support (e.g. through labour
laws, trade unions or government wage regulations), companies can artificially suppress wages
so as to usurp higher profits or minimise costs. in many cases, employers are under no pressure
to share the benefits of rising productivity with their workers, especially in situations where large
shares of the population are underemployed so that firms can easily replace current workers and
find people willing and able to work in low-skilled manufacturing activities without offering wage
incentives.

At early stages of economic development, in particular, an employment-intensive industrialisation

trajectory can be desirable in order to ensure rising employment opportunities that are accessible

8 United Nations Development Programme (UNDP) and international Labour Organization (iLO) (2007), Asian
Experience on Growth, Employment and Poverty, Colombo: UNDP Regional Centre in Colombo
9 Rodrik, D. (2011), The manufacturing imperative, Commentary, Project Syndicate, available from:
www. project-syndicate.org/commentary/the-manufacturing-imperative

9
 to the poor, but also to enhance the poor’s ability to move into higher productivity sectors over time.
This requires education, training and social safety nets which can buffer against the painful effects
of structural change which, as pointed out above, often involves processes of “creative destruction”
whereby certain, often traditional or unproductive, activities go into decline. Without cash transfer
systems or other government support mechanisms in place, populations who are displaced from
traditional forms of production can easily fall into a poverty trap unless they are supported through
the transition. However, in most low-income countries governments lack the financial resources
to fund such social policies. it is therefore important to not only maximise the current poverty
alleviating effects of industrialisation through quality employment opportunities but there also
needs to be investment in population’s current and future capabilities and skills so that the country
is able to progressively move into more dynamic and productive activities over time.
Conceptual Framework

In light of the above deliberations, we can understand inclusive industrial development as a

process of structural change which generates broad-based opportunities for quality employment
and productive activities for large segments of society and which, thereby, contributes to poverty
alleviation. While above the focus was on quality employment generation as an important
channel for achieving inclusive growth through the absorption into the labour force of un- and
underemployed populations (which is covered in EQuiP tool 5), inclusiveness can also be conceived
as involving other dimensions as well. For example, inclusiveness can also be understood to
refer to an industrial development trajectory that offers opportunities to disadvantaged regions
or sections of the population (e.g. women, ethnic minorities, youth) to be included in (i.e. to
participate in, contribute to and benefit from) the industrialisation process, thereby reducing
inter-regional, inter-gender or inter-generational inequalities (these dimensions of inclusiveness
are, however, currently not covered exhaustively in the EQuiP toolbox).

Thus, for lower-income countries the social benefits of industrialisation can be maximised by
promoting an industrial structure that is labour-intensive, embedded in the domestic economy
(e.g. has high linkages with other sectors), and which provides decent working opportunities for
poor and vulnerable populations. Social cohesion and development can therefore be promoted by
an industrial strategy that embodies the recognition that economic growth is primarily a means
towards broad-based needs fulfilment rather than an end in itself.

10
4. Sustainable Industrial Development
The term sustainability means many things, but when we think about contemporary industrial
development experiences, two core themes arise: The first is the stability or resiliency of the
industrial sector. Many countries that pursued export-oriented industrial strategies have been
hit hard by external turmoil, e.g. the latest global economic crisis, illustrating the importance
of developing industrial structures which can withstand shocks. Second comes the recognition
of the intense environmental impact of industrial activities, in terms of resource depletion and
environmental contamination. The world is at a tipping point, and the devastating consequences
of climate change are becoming increasingly evident, with many low-income countries being

Sustainable Industrial Development

disproportionally affected by its negative consequences. While the first theme has been touched
upon in Section 2, the second theme will be outlined in the following.

When we approach the issue of environmental sustainability of industrialisation, the concepts of

“Greening industries” and “Green industry” (or “eco-industries”) offer useful starting points.10
Both concepts outline pathways to achieve economic-environmental “win-win scenarios”, with
the “greening of industries” concept focusing on increasing (resource, energy, etc.) efficiency and
reducing pollution and waste while the “green industry” concept puts emphasis on new markets
(for environmentally friendly products and/or renewable energy) and “green jobs”.

When we consider the environmental sustainability of industrialisation, we are, thus, speaking

about both the inputs into and outputs of manufacturing activities. On the output side,
environmental sustainability relates to the emissions and pollutants that result from production.
On the input side, it relates to the natural resources required for the production of goods.

Since low-income countries contribution to global greenhouse gas (GHG) emissions is still minor,
it would be unfair to hinder their industrialisation process by imposing on them undifferentiated
emissions targets at par with those for high-income countries. However, emissions, pollutants
and contaminants as well as their effects (especially on human beings but also on land and water
sources) are a serious concern in many developing countries. it is therefore important to develop
strategies that, from the beginning, take into account environmental considerations and which,
on this basis, can foster industrial development without irreparably damaging the ecosystem
it depends on. One important strategy for achieving this is by focusing on enhanced resource
efficiency as a mechanism to enhance competitiveness and minimise environmental impacts.11

Our initial definition of manufacturing was the transformation of raw materials into final goods.
This definition is important because it draws our attention to the fact that natural resources
make up industrial products. All manufacturing requires natural resources, such as water, energy
and materials. it is vital that lower-income countries use their resource stocks wisely and do not
destroy the resources required for their economy’s growth and development today and tomorrow.
Developing countries today have an opportunity to follow a different method of efficiency
enhancement which focuses on minimising resource consumption.

The manufacturing sector has historically played a unique role in development as the hub of
innovation, technological progress and productivity enhancement in economies. Productivity
increases can come from enhanced labour, capital or resource efficiency. However, most of the
technologies that were developed in the last two centuries have focused on enhancing labour
efficiency. This is likely because of the fact that as industrialised economies continued to develop,

10 See UNIDO (2011), UNIDO Green Industry. Policies for supporting Green Industry, Vienna: UNIDO
11 See, for example: UNIDO (2011), Industrial Development Report 2011, Vienna: UNIDO

11
 they innovated within a context where labour was increasingly expensive in their countries while
raw materials could still be gotten cheaply from developing countries. This is one of the reasons
why we have seen labour productivity increase twenty-fold in the last 200 years, while an emphasis
on enhancing productivity through resource efficiency has only recently been prioritised (due to
resource depletion, volatile commodity prices and rising awareness of climate change).

Developing countries therefore have a unique opportunity to innovate on the basis of enhanced
resource efficiency as a way of boosting productivity without having to shed labour. increased
resource efficiency can lead to a reduction in the use of energy, materials, water and other
resources as inputs into manufacturing production; where such inputs are imported, increased
efficiency can help reduce vulnerability related to dependency from external supply (see EQuiP
Conceptual Framework

tool 6). Enhanced resource efficiency is particularly powerful for small and medium enterprises,
which account for the majority of firms in most developing countries. innovating to enhance
resource efficiency can therefore be a vital strategy for developing countries not only to promote
the greening of their industries but also to enhance their competitiveness against countries that
have had a head start in terms of industrialisation. Similarly, to achieve a greening of industry at
the output side of manufacturing activity, innovation in technology and production organisation as
well as related investments will be necessary to contain the growth of greenhouse gas emissions,
contaminants and waste that pollute and degrade the ecosystem.

Such greening of industry efforts are likely to require, or at least benefit from, the emergence
and expansion of “green industries”. Broadly speaking, “green industries” are those industries
that produce ecologically supportive and/or sustainable products. Creating “green industries” is,
thus, about stimulating the development of new economic activities and industries that provide
environmental technologies, goods and services - i.e. products aimed at contributing to reducing
negative environmental impacts or addressing the consequences of various forms of pollution.
“Green industries” include, for example, renewable energy, recycling, waste management and
treatment, machinery and equipment for air pollution reduction, bio-products and electric mobility.
Wherever supporting the creation of such industries leads to “green jobs”, the result is a triple
positive bottom line, i.e. economic-environmental-social win-win-win scenarios. However, it has
to be recognised that a number of such “green industries” or “green technologies” might still be
beyond reach for developing countries given their level of available capabilities and skills. Yet, the
“green industry ambition” of a country cannot only be derived from its actual “green industry”
productive capacity and employment but is also reflected in its imports of “green products”,
including environmental equipment and technologies.12

Overall, sustainable industrial development is about taking a longer-term perspective when

deciding which sectors to support and how. it is about the recognition that we live in a world of
limits and nothing can go up forever without coming back down. Therefore checks and balances
need to be put in place to ensure that the wealth generated today from manufacturing activities
will not undermine the chances of equal or higher living standards in the future.

12 While recognising the huge importance of “green industries”, the EQulP toolbox currently does not offer related
diagnostic and analytical methodologies.

12
5. Industrial Capabilities and
Framework ­Conditions
Inclusive and sustainable industrial development is the outcome of a complex and dynamic
web of processes and interactions between different actors. in the previous sections, we have
sketched how inclusive and sustainable industrial development can manifest itself. We have said
little about the “enablers” and “drivers” of these outcomes, though. However, for the purposes
of evidence-based industrial policy-making it is important for industrial diagnoses not only to
be concerned with the measuring of performance but also with understanding why and how a

Industrial Capabilities and Framework ­Conditions

particular performance has come about. That is, it is important to also investigate the drivers of
(or obstacles to) industrial performance.

For some time, and during the era of the Washington Consensus in particular, many stakeholders
including international organizations and donor agencies emphasised the importance of
governments providing and ensuring an “enabling environment” for private sector operations as
key determinant of economic growth and industrial development. The focus was on regulatory,
policy and other framework conditions that would distort market forces as little as possible (or
necessary) while providing a “business environment” conducive to private sector investment.
Meanwhile, another school of thought, which has re-gained importance in recent years, has
highlighted the accumulation of (industrial) capabilities as a key driving force for industrial
development.13

Broadly speaking, countries’ industrial capabilities comprise various types of firms’ competencies
(associated with production and its organization, technological change and innovations) as well as
firms’ production capacity (determined by investments in machines, equipment and other capital
goods). The accumulation and further development of these capabilities requires the access to
and availability of finance, skills and technology, amongst other things. in addition, countries’
industrial capabilities also relate to the physical and institutional infrastructure supporting the
overall productive economy. This includes, inter alia, transportation, communication, quality,
innovation and energy infrastructures as well as the richness and efficacy of the (public but also
private) institutional landscape.

Factors like these play a crucial role in framing, shaping, influencing and driving countries’ industrial
performance. Hence, such industrial capabilities are commonly viewed as the main “drivers”
and “enablers” of countries’ industrial performance (EQuiP tool 9 presents methodologies to
identify and assess such drivers and enablers).it is for this reason that industrial capabilities
have increasingly become the subject and target of industrial policies. Policy interventions today
increasingly aim at fostering the development or improvement of such industrial capabilities with
the objective of promoting industrial development.

industrial capabilities also shape and determine inclusiveness and sustainability outcomes
of industrialization. The availability of skills, technology, finance and innovation capacities, for
example, influences all three pillars of inclusive and sustainable industrial development, i.e.
the economic, the social as well as the environmental performance of a country’s industrial
sector. However, certain industrial capabilities might be more conducive to achieving economic

9 See, for example: UNIDO (2002), Industrial Development Report 2002/2003, Vienna: UNIDO; Lall, S. (2001),
Competitiveness, Technology and Skills, Cheltenham, UK: Edward Elgar Publishing; Cimoli, M., Dosi, G. and J.
Stiglitz (2009), Industrial Policy and Development. The Political Economy of Capabilities Accumulation, New York:
Oxford University Press; or Andreoni, A. (2011), Productive Capabilities Indicators for Industrial Policy Design,
UNIDO Working Paper 17/2011, Vienna: UNIDO

13
 objectives than, say, social outcomes. For example, putting a country on an inclusive industrial
development trajectory might, at least in the short term, require the promotion of another set of
skills than would be needed for achieving (pockets of ) industrial upgrading in certain sub-sectors.
Similarly, technological progress or adaptation needed to promote the greening of industry and
environmental sustainability is likely to be somewhat different from a technological trajectory
conducive to achieving industrial diversification, for example. Thus, there are, again, possible
trade-offs between different policy objectives that policy-makers have to keep in mind and deal
with when designing policies aimed at the development and upgrading of industrial capabilities.

Finally, it is worthwhile pointing out that a country’s industrial performance is also shaped by a
number of broader framework conditions. These include national factors such as the country’s
Conceptual Framework

location, its endowments but also sub-sector and firm characteristics. Framework conditions also
relate to a number of international and global factors such as the nature of the country’s integration
into the global economy (e.g. through multilateral, regional and bilateral trade and investment
agreements), global regulations and economic governance mechanisms as well as international
competition and demand patterns and dynamics. While many of these framework conditions are
hard (if not impossible) to change with industrial policy interventions, some can be influenced and
shaped by policy action (see EQuiP tools 8 and, to some extent, also 9).

14
6. EQuIP and
Evidence-Based Industrial Policy-Making
As mentioned in the beginning, for industrial policies to be successful it is crucial, amongst other
things, for them to be evidence-based. This is where the EQuiP toolbox can come in. It compiles
a number of different diagnostic methodologies that allow for an integrated and comprehensive
analysis and benchmarking of a country’s industrial setup and performance. The different tools and
methodologies are based on a set of mostly quantitative indicators that help to shed light on how
a given country has been doing and where it stands with regard to the inclusive and sustainable

EQuIP and Evidence-Based Industrial Policy-Making

industrial development process sketched on the previous pages.

The insights gained from applying the EQuiP toolbox can feed into various stages of an
evidence-based industrial policy cycle. First and foremost, they allow undertaking a comprehensive
industrial diagnosis that can help policymakers and public analysts to identify the strengths and
weaknesses of their country’s industrial sector. They also allow benchmarking against other g
countries. The findings from such diagnostic and benchmarking exercises can help policymakers
B in formulating a strategy for inclusive and sustainable industrial development and in prioritising
areas or sectors for policy intervention. The EQuiP tools allow to establish a comprehensive
baseline scenario and, primarily through benchmarking, to come up with realistic target values
for key performance indicators.

More broadly, the EQuiP toolbox can be used to outline a comprehensive target system for
industrial policy aimed at promoting inclusive and sustainable industrial development. Such a
target system can also be used to support policy-makers in their efforts to monitor and evaluate
(M&E) the success of policy interventions. It can help policy-makers to identify and learn from past
policy failures and recognise possible trade-offs between different policy objectives; such insights
can then, in turn, feed into a flexible and continuous adaptation of industrial (and possibly also
other) policies.

The EQuIP toolbox also covers issues related to institutional setups and arrangements that are
conductive to effective industrial policy making and goes into discussing possible policy instruments
and their implementation for achieving the objectives. In other words it addresses questions such
as, for example: What kind of institutions are needed for successful industrial policy-making (e.g.
ministerial units, councils, committees, agencies, etc.), how should they be designed, resourced
and staffed, and how should responsibilities be distributed and accountability be ensured? How
to best establish and design mechanisms that allow and promote information exchange and
coordination between different stakeholders (i.e. different ministries, public agencies, private
sector actors, universities, financial institutions, trade unions, etc.)?

However, some limitations of both this conceptual framework document as well as the EQuiP
toolbox more generally have to be recognised. The conceptual framework should not be considered
a final portrayal but rather, as the entire toolbox, in a constant state of work in progress; that is,
it should be viewed as a point of departure for discussion towards further refinements of the
concept of inclusive and sustainable industrial development. Furthermore, while it offers some
hints on possible trade-offs between different objectives that policy-makers need to take into
account when formulating strategies and policies to promote inclusive and sustainable industrial
development, these trade-offs are not explored in much detail; more in-depth analytical work is
needed to provide more concrete insights on where such trade-offs can be expected.

15
 In summary, the EQuiP toolkit aims at supporting the creation of lasting strategic decision-making
capacities rather than quick fixes. We believe that this is more in line with the idea of an iterative
and experimental approach to industrial policy which has been emphasised in recent academic and
practitioners’ debates. Hence, EQuiP aims at creating national pockets of excellence for industrial
strategy and policy design, monitoring and continuous adaptation that can review existing plans/
strategies, question new advice received from international advisors, propose new initiatives,
and (maybe most importantly) monitor whether ongoing programs are delivering results which
are in line with the strategic vision of the country. In a nutshell, applying EQuiP will not deliver
industrial strategy blueprints for developing countries as other approaches to industrial policy
design attempt. Instead, it will provide a range of inputs into an independent national industrial
strategy-setting and a classification device of different types of policy instruments that countries
Conceptual Framework

can consider as options when designing their industrial policy packages. Accordingly, the EQuiP
approach is based on a number of principles that jointly ensure an evidence-based and flexible
approach to industrial strategy formulation. Amongst other things, it emphasises the importance of
basing any policy decision on transparent (often quantitative) evidence on country characteristics
and conditions, of acknowledging synergies and trade-offs between different policy objectives, of
viewing an industrial strategy as the starting and reference point for a continuous experimentation
and learning process and presents a structured method for indepentently assessing and combining
policy instruments into coherent industrial policy packages. The industrial policy design is
conceived as an open-ended cycle that allows for constant adaptation and to ensure that all stages
of the policy cycle are successful, the process must be backed by suitable institutional structures.
Thereby, the focus of the EQuIP toolbox is not on identifying any universal best institutional setup,
but on analyzing different options for institutional setups and adapting a setup which relates to
specific country and state-society contexts. With the recognition of these principles at its heart, we
hope that what EQuiP can contribute to sound industrial policy-making in lower-income countries.

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v. 1.0 - May 2017

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Vienna International Centre, P.O. Box 300, 1400 Vienna, Austria
E-mail: policy@unido.org

DEUTSCHE GESELLSCHAFT FÜR INTERNATIONALE ZUSAMMENARBEIT (GIZ) GMBH

Friedrich-Ebert-Allee 40, 53113 Bonn, Germany

E-mail: sv-nawi@giz.de
Website: www.equip-project.org