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This chapter analyses production capabilities – an essential component for the Aid for Trade Initiative to be effective. Past growth in manufacturing and related services sectors has absorbed large numbers of workers into productive jobs and increased the prosperity of their families and communities. Industrialisation and structural transformation remain at the core of many national and regional economic development strategies. In view of greater automation and digitisation, this chapter also discusses the implications of the changing nature of industrialisation and the production process for the future of manufacturing development. Policy lessons are drawn to address “supply side constraints” in manufacturing through aid for trade, which in turn contributes to structural transformation. One theme that re-emerges throughout the chapter is the opportunities industrial policy offers for inclusive and sustainable development. Relevant environmental aspects, like green technologies and energy efficiency, are also considered in the context of economic competitiveness and sustained growth. AID FOR TRADE AT A GLANCE 2019: ECONOMIC DIVERSIFICATION AND EMPOWERMENT © OECD, WTO 2019 82 CHAPTER 3. PROMOTING ECONOMIC DIVERSIFICATION AND STRUCTURAL TRANSFORMATION THROUGH INDUSTRIALISATION INTRODUCTION The manufacturing sector and the process of industrialisation are the key drivers of growth and poverty reduction. As Figure 3.1 illustrates, a positive relationship exists between the growth of manufacturing value added1 (MVA) and of gross domestic product (GDP). Higher productivity growth in the manufacturing sector makes it an important factor for developing countries to shift activities from agriculture and low productivity services towards manufacturing to achieve growth-enhancing structural transformation (Figure 3.2). In countries that have successfully industrialised, the growth in manufacturing and related services sectors has led to the absorption of large numbers of workers from the agriculture and informal sectors into productive jobs, and has increased the prosperity of those workers’ families and communities (UNIDO 2013). Thus, industrialisation and structural transformation remain at the core of many national and regional economic development strategies, and the United Nations has acknowledged this in Sustainable Development Goal (SDG) 9: Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation. Figure 3.1. Relationship between GDP growth and manufacturing growth, 1970-2017 All values are in constant 2010 USD Source: UNIDO elaboration based on the National Accounts Main Aggregates Database (2019), by the United Nations Statistics Division. Based on the importance of the manufacturing sector, this chapter explores the processes behind industrialisation and how sustainable and inclusive economic development can be achieved through the development of this sector. Moreover, in view of the emergence of new technologies, the chapter also discusses the implications of the changing nature of industrialisation and production processes for the future of manufacturing development. For example, greater automation and digitisation may create uncertainty about future paths of development. This chapter demonstrates that latent uncertainty arising from the new emerging paradigm can be transformed into an opportunity for countries across all development stages. Additionally, the chapter draws policy lessons to address supply side constraints in manufacturing through aid for trade, which in turn contributes to structural transformation and economic prosperity. One topic that is discussed throughout the chapter is the opportunities industrial policy offers for inclusive and sustainable development. Relevant environmental aspects, like green technologies and energy efficiency as part of a sustainable growth strategy are also considered in the context of the expansion of the manufacturing sector. 0

Promoting economic diversification and structural transformation through industrialisation