Improving basic conditions for industrial production in developing countries.

 

Developing countries face significant challenges in building sustainable industries, particularly in areas such as basic infrastructure, productive capacity and institutional capabilities to Design and implement effective industrial policies. Infrastructure—including electricity for powering industry, telecommunications for supporting commerce, and efficient roads, railways and ports for transporting goods—has long been recognized as a cornerstone for industrial development. In many developing countries, however, key infrastructure services remain in short supply and of poor quality. Although these problems are most acute in LICs, they represent a significant challenge in most MICs as well. Moreover, infrastructure coverage tends to be much lower in rural areas, where the majority of the developing world’s poor live. At the same time, urban infrastructure coverage is also under pressure, partly because of rapid rural-urban migration in many countries. In Africa, for example, 43% of the population still lacks access to electricity and approximately 80% of African businesses report frequent power outages. The continent’s road density is only about 20% of the global average, with just 27% of roads paved, far behind India’s 60% and China’s 66%. Meanwhile, infrastructural demands continue changing as industry modernizes. Digital infrastructure, in particular, is becoming increasingly critical, including data centres, internet connectivity, automation support, digital payment systems and smart manufacturing technologies. Among the infrastructure sector, telecommunications has made the biggest headway, while electricity, transport and housing are at intermediate stages, and water and sanitation are lagging behind. Efforts are also needed to improve the framework conditions for private investment in infrastructure. Moreover, public investment must reverse the decline of the past decade, which will require greater domestic resource mobilization and greater external assistance. To ensure that increased investment is both effective and sustainable, it must be accompanied by better policies and governance reforms. Despite economic growth in developing countries over recent decades, this has not consistently translated into positive development outcomes: many LDCs remain highly vulnerable to poverty, food insecurity and inequality. This is largely attributable to a lack of productive capacities, i.e. the set of productive resources, entrepreneurial capabilities, human skills and production linkages that determine a country’s ability to produce goods and services. Due to their lack in productive capacity, coupled with limited economic diversification and human capital, developing countries have few means to respond to external shocks meaning their socioeconomic progress remains fragile. Labour productivity in LDCs has also slowed over the past decade, further constraining their development potential and underscoring the urgent need to strengthen productive capacities. With the 2030 Agenda for Sustainable Development deadline fast approaching, and developing countries increasingly grappling with the effects of geopolitical conflicts, climate change and other unforeseen shocks, it is essential to place productive capacity at the centre of any developmentstrategy. These countries should focus on establishing viable manufacturing hubs, at least within key industrial sub-sectors, to stimulate entrepreneurship, accelerate industrial development, and create the foundation for the development of productive capacities in other sectors such as infrastructure and technology. With regard to institutional capabilities, governments have traditionally relied on industrial policy to accelerate the development of domestic production capacity in selected industries and enhance the competitiveness of local producersthrough protectionist measures, technological upgrading, training and investment promotion. In all cases of successful industrial development throughout history, the state has played an indispensable role. As highlighted in Section 1, countries such as the Republic of Korea and China, along with many others, have achieved industrial production and export growth through strategic planning. They have leveraged state-owned enterprises, sovereign wealth funds, development banks, industrial and technology parks, special economic zones, business incubators and substantial investment in infrastructure essential for industry. In recent years, industrial policy has experienced a resurgence, driven by challenges such as the global financial crisis, rapid technological advancements, the COVID-19 pandemic, and the need for a green transition. Notably, this wave of industrial policy interventions has been driven by large economies, with China, the European Union and the United States accounting for nearly half of all new measures in 2023. In contrast, far fewer policy initiatives have been implemented in LDCs. According to the IMF, over 2,500 industrial policy measures were introduced globally last year, with more than two-thirds involving regulatory and trade-distorting measures that discriminated against foreign commercial interests. For low- and middle-income countries, modern industrial policies are essential but often underfunded, putting them at risk of falling further behind in global production. To address growing inequalities, developing countries need industrial policies that focus less on regulation and more on creating incentives for industrial firms to build industrial capacity and to enhance skills and knowledge in the workforce. Targeted policies, including investment in infrastructure and human capital, should be prioritized to drive productive capacity and structural transformation. Each developing country has unique political, socioeconomic and institutional contexts that determine how productive capacity can best be developed and leveraged.