Structural transformation to mitigate persistent technology gap

Structural transformationStructural transformation or change can be broadly defined as the reallocation of economic activity across three broad sectors, agriculture, manufacturing and services, which accompanies the process of economic growth -—
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—-. It usually refers to the transfer or shift of production factors — especially labour, capital and land — away from activities and sectors with low productivity to those with higher productivity, which are typically different in location, organization and technology -—
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—-., a pivotal driver of economic development, traces its roots in scientific advancements centuries ago, as noted by -—
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—- describe. Technological innovation, underscored by international cooperation, plays a vital role in this process -—
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—-. It entails a shift from raw material extraction to manufacturing, followed by a transition to services as economies mature. According to -—
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—-, this transition occurs when GDPGross domestic product (GDP) is an aggregate measure of production, income and expenditure of an economy. As a production measure, it represents the gross value added, i.e., the output net of intermediate consumption, achieved by all resident units engaged in production, plus any taxes less subsidies on products not included in the value of output. As an income measure, it represents the sum of primary incomes (gross wages and entrepreneurial income) distributed by resident producers, plus taxes less subsidies on production and imports. As an expenditure measure, it depicts the sum of expenditure on final consumption, gross capital formation (i.e., investment, changes in inventories, and acquisitions less disposals of valuables) and exports after deduction of imports -—
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—-. per capita reaches around $13 000 at 2005 prices and when manufacturing accounts for around one fifth of value added. -—
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—- defines industrialized economies as those with manufacturing value addedManufacturing value added (MVA) is the net-output of all resident manufacturing activity units. It is obtained by adding up their outputs and subtracting intermediate inputs -—
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—-. Manufacturing can broadly be understood as "the physical or chemical transformation of materials, substances, or components into new products" -—
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—-, consisting of sector C in the International Standard Industrial Classification of all Economic Activities (ISIC) revision 4 -—
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—-. exceeding $2 500 per capita, adjusted to purchasing power parities.

Structural transformation enhances productivity and incomes while fostering diversification of production, thereby mitigating vulnerabilities to market shocks. The Bridgetown Covenant -—
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—- identifies “transforming the economies through diversification” as a critical element for inclusive prosperity. Access to requisite technologies, particularly in an increasingly digitalized landscape, is vital for successful structural transformation. The Covenant emphasizes that industrialization must align with sustainability and inclusivity to realize the goals of the 2030 Agenda while ensuring equitable distribution of its benefits.

No sign of further industrialization in Africa and LDCs

In 2022, manufacturing value added per capita in developed economies amounted to $5 366 (at constant 2015 prices), significantly surpassing other regions (figure 1). It was 3.6 times higher than in developing Asia and Oceania ($1 494) and 4.7 times higher than in developing Latin America and the Caribbean ($1 134). It exceeded the value in Africa ($209) by over 25 times.

Over the past two decades, manufacturing value added per capita in developing Asia and Oceania has steadily risen to 3.5 times its 2002 value. In contrast, Latin America and the Caribbean experienced a slow decline over the last decade, with the region overtaken by Asia in 2016. Africa has seen a modest increase of 13 per cent over 20 years, although there has been a recent downward trend since 2018, with a drop from $216 to $209 in 2022. Developed economies, despite disruptions from the global financial crisis and the COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-., have generally exhibited modest and steady growth, with pre-pandemic trends resuming.

Figure 1. Manufacturing value added per capita: stable in most regions, rapid growth in Asia and Oceania

United States dollars in constant 2015 prices (SDGSustainable Development Goal 9.2.1)

Source: UNCTAD calculation based on UNCTADstat -—
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LDCs falling behind the target path towards industrialization

In 2022, manufacturing value added per capita in LDCsLeast developed country averaged $163, at 2015 prices, 33 times less than the average of the developed world. Despite this gap, LDCs have seen steady growth, with manufacturing value added per capita already 4.5 times higher in 2022 compared to 2002, representing an average annual growth rate of eight per cent (figure 1).

Regarding SDG target 9.2, with a focus on the manufacturing sector's contribution to value added, LDCs made progress, increasing from 11.8 per cent in 2002 to 14.8 per cent in 2022, primarily between 2015 and 2019. However, during the COVID-19 pandemic, this growth stagnated at around 15 per cent (figure 2), posing challenges to achieving the SDG target of doubling LDC’s manufacturing share in value added by 2030. The required annual increase from 2005 onwards to meet the target was 0.4 percentage points, but the actual average increase until 2022 was 0.2 percentage points.

While the manufacturing employment share has followed a trajectory closer to the target path than its value added share, the gap between the actual and target paths expanded after 2013. Employment growth in manufacturing for LDCs has stagnated at around 7.8 per cent since then. The relatively constant employment shares in LDCs alongside increasing value added imply an overall improvement in productivity, which can be considered as encouraging. However, it's essential to recognize that these are weighted averages, and data coverage challenges likely mask variations in manufacturing employment and value added among different LDCs.

Figure 2. LDCs far from reaching the target of doubling the manufacturing share of value added and employment by 2030

Percentage (SDG 9.2.1, SDG 9.2.2)

Source: UNCTAD calculations based on UNCTADstat -—
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—-, UN SDG Indicators Database -—
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Note: Target and target path set with reference to the base year 2005.¹ Due to data availability, ILOInternational Labour Organization relies on a proprietary model to estimate missing values, see ILOEST website for further information -—
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Productivity-driven and employment-driven transformations

Between 2002 and 2022, developing Asia and Oceania witnessed a significant increase in the share of manufacturing in value added (from 19.4 to 24.2 per cent; figure 3), signaling the region’s growing importance in global industrial production. Concurrently, manufacturing output per capita showed resolute growth. However, the share of manufacturing in employment declined (from 14.2 to 11.9 per cent), reflecting productivity-driven transformations. Conversely, Africa saw an increase in the manufacturing share in employment (from 7.1 to 8.5 per cent), alongside a decline in value added (from 12.8 to 10.9 per cent), during the same period. This suggests a shift characterized by growing manufacturing employment share with stagnant productivity. Latin America and the Caribbean experienced a decrease in the share of manufacturing in value added and employment. In developed economies, the share in value added remained almost constant, while the share in employment fell, indicating productivity gains.

Figure 3. Share of manufacturing in total value added and employment

Percentage (SDG 9.2.1; SDG 9.2.2)

Source: UNCTAD calculations based on UNCTADstat -—
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Persistent technology gap in manufacturing

The 2030 Agenda advocates for technological advancement, especially in developing economies. Progress towards the target is gauged by the proportion of medium and high-tech value added in total manufacturing value added (SDG indicator 9.b.1). Progress signifies a transition to higher technology value added, typically resulting in increased average value added per worker. R&DResearch and development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge -—
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—-. and innovation play a pivotal role in facilitating this shift by enabling the adoption of newer and more efficient technologies.

In 2021, developed economies continued to outpace developing economies in the contribution of medium and high-tech industries to manufacturing value added. Weighted regional averages depicted by dots in figure 4 reveal that about 50 per cent of manufacturing output in developed economies originated from medium and high-tech sectors. The share varied considerably across developing regions, with developing Asia and Oceania at 42 per cent, developing America at 31 per cent, and Africa at 22 per cent.

From 2011 to 2021, the share of medium and high-tech manufacturing increased in nearly all regions. Developed economies raised this share by 1.5 percentage points, developing Asia and Oceania by 1.2 percentage points and Africa by 1.1 percentage points. In developing Americas, it nearly stagnated, suggesting these economies have not reduced their reliance on sectors like agriculture and commodities. Figure 4 reveals considerable variation within regions, especially in developing Asia and Oceania. This region includes the world's most innovative manufacturing sectors, such as Singapore (82 per cent in 2021) and Taiwan Province of China (73 per cent), alongside economies where the share of medium and high-tech industries in value added remained below three per cent, such as Cambodia, Tonga, Yemen, Tajikistan, and Maldives.

Figure 4. Share of medium and high-tech industryMedium and high-tech industry is an industry in which producers of goods incur relatively high expenditure on research and development (R&D) per unit of output. The distinction between low, medium, and high-tech industries is based on R&D intensity, i.e. the ratio of R&D expenditure to an output measure, usually gross value added. For a list of the particular economic activities, considered to be medium and high-tech -—
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—-. in manufacturing value added indicates a technology divide

Percentage (SDG 9.b.1)

Source: UNCTAD calculations based on -—
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Notes: A violin plot shows the distribution of individual economies’ medium and high-tech industry shares in manufacturing value added within each economy group and year. The coloured area indicates the distribution of individual economies, smoothed by kernel density estimation, around the regional average (white dots). The wider the violin shape, the higher the possibility to find a economy around the corresponding indicator value.

Examining international trade, we can observe a convergence in the share of medium and high-tech in total manufacturing exports across world regions. In 2022, nearly two thirds (61 per cent) of manufacturing exports from developed economies consisted of medium- or high-tech products (figure 5). This share has remained constant over the last decade but may change due to policy shifts on reshoring and the fragility of long supply chains (e.g. CHIPS and Science Act in the United States -—
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—-). contrast, in Africa, 35 per cent of manufacturing exports were medium- or high-tech in 2022, marking a 6 percentage points increase from 10 years before.

Figure 5. Many developing economies progressively catching up with developed in high-tech intensity of exports

Share of medium and high-tech manufactured exports in total manufacturing exports, percentage

Source: UNCTAD calculations based on -—
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R&D spending increasingly concentrated in a few economies

Global R&D spending was estimated at 1.93 per cent of GDP in 2021, up from 1.76 per cent of GDP over the five years preceding the pandemic -—
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—-. This equates to approximately $1.88 trillion of the $97.3 trillion global GDP -—
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—- spent on R&D in 2021. From 2015 to 2021, global R&D expenditures grew strongly at an average annual rate of 7.4 per cent, measured in current PPP-dollars. The COVID-19 pandemic further boosted R&D spending, particularly in the medical and IT sectors, with significant funding reallocated to IT, electronic equipment, pharmaceutical and biotechnology companies.

Figure 6. United States of America and China dominate global R&DResearch and development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge -—
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—-. spending

Percentage share of spending in United States dollar PPPPurchasing power parity

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The bulk of global R&D investment is concentrated in a few economies. In 2021, China and the United States of America alone accounted for just over half of the total global R&D spending (figure 6). Some 78 per cent was concentrated in the top 10 R&D-investing economies in 2021, up from 73 per cent in 2010, indicating increasing concentration of R&D spending. This trend runs counter to SDG target 9.5.1, which aims to upgrade technological capabilities of industrial sectors in all economies. The COVID-19 pandemic reinforced this trend; for example, the United States of America increased its R&D investment from an average of 2.9 per cent of GDP pre-pandemic to 3.5 per cent measured in 2020 and 2021, approaching the rapid R&D expenditure growth in China. It has grown over 10 per cent annually over the last seven years (in current PPP-dollars). In the rest of the world, R&D spending grew by an average of 5.7 per cent annually between 2015 and 2021.

Table 1. Developing economies lagging further behind developed in their R&D expenditures, 2021

(SDG 9.5.1)

	Gross domestic expenditure on R&D Percentage of GDP	Gross domestic expenditure on R&D Millions PPP-$	R&D-related services exports 1 Millions $
Top 5 overall
Israel	5.6	22 930	13 036
Republic of Korea	4.9	119 583	5 859
United States of America	3.5	806 013	108 112
Belgium	3.4	23 396	12 384
Sweden	3.4	21 402	13 561
Top 10 developing economies
China	2.4	667 639	15 507
Singapore	2.2	13 416	1 576
United Arab Emirates	1.5	..	..
Türkiye	1.4	36 233	426
Thailand	1.3	..	70
Brazil	1.2	..	862
China, Hong Kong Special Administrative Region	1.0	..	537
Malaysia	1.0	..	743
Egypt	0.9	..	1
Tunisia	0.7	..	6

¹UNCTAD secretariat estimates; include R&D services and IP charges related to R&D.

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Note: UNCTAD secretariat estimates; includes R&D services and IP charges related to R&D.

The highest R&D spending as a percentage of GDP were recorded in Israel, the Republic of Korea, the United States of America, Belgium, and Sweden (table 1). Most of these economies also report significant international trade in R&D-related services, such as R&D servicesResearch and experimental development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge. (The OECD Frascati Manual) The definition used for international trade (MSITS 2010) includes testing and product development that may give rise to patents, as an addition. and intellectual property charges. Among developing economies, China had the highest R&D intensityR&D intensity is defined as the ratio of gross domestic expenditure on research and development (GERD) to GDP -—
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—-. at 2.4 per cent of GDP in 2021, followed by Singapore at 2.2 per cent. In all other developing economies, this indicator remained below two per cent. Only eight developing economies had an R&D intensity of one per cent of GDP or higher, with Brazil being the only one outside Asia. Notably, in Africa, Egypt and Tunisia ranked among the top 10 developing economies in R&D intensity.

The findings align closely with the Global Innovation Index -—
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—- which measures innovation inputs and returns on that investment. In 2023, the top performers were Switzerland, Sweden, and the United States of America. Among developing economies, Singapore ranked 5^th overall, China 12^th, and Hong Kong SARSpecial Administrative Region 17^th. Other high-ranking developing economies included the United Arab Emirates, Malaysia, Türkiye, India, Thailand, and Viet Nam (46^th overall). In Latin America and the Caribbean, Brazil led at 49^th, followed by Chile, Mexico, Uruguay, Colombia, and Argentina (73rd^th overall). In Africa, Mauritius and South Africa were the highest ranked at 57^th and 59^th, respectively, with Morocco, Tunisia, Botswana, and Egypt also notable performers.

Figure 7. Developing economies lag further behind in R&D expenditure in GDP

Percentage (SDG 9.5.1)

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Note: Regions as defined by UNESCOUnited Nations Educational, Scientific and Cultural Organization.

Northern America saw the highest increase in R&D intensity, rising from 2.7 per cent of GDP in 2015 to 3.3 per cent in 2021 (figure 7). Eastern and South-Eastern Asia continued their solid progression, and Europe’s R&D investment intensified further. Western Asia and Northern Africa also gained in R&D intensity, while other regions recorded declines. In LDCs, R&D expenditure remained constant at 0.3 per cent of GDP, while SIDSSmall island developing states (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992. More information on UNCTAD official page. saw a decrease from 1.0 per cent in 2015 to 0.7 per cent in 2021, indicating difficulties faced by many developing economies in allocating resources to R&D.

The number of R&D employees, as FTEFull Time Equivalent (FTE) unit of labour is the hours worked by one employee on a full-time basis. The concept is used to convert the hours worked by several part-time employees into the hours worked by an equivalent full-time employee (ideally the comparison is standardized for gender and industry sector). per million inhabitants (SDG indicator 9.5.2), highlights the Republic of Korea (9082 R&D employees per million), Sweden (8131), Finland (7871), and Denmark (7708) as top performers, closely followed by Singapore and Iceland. Besides Singapore, other highly ranked developing economies included Hong Kong SAR (4585), Macao SAR (4132), the United Arab Emirates (2 666), Thailand (2 024, refers to 2020), and Türkiye (2000), all above the world average of 1325 R&D employees per million inhabitants. These ficures include researchers, as well as R&D technical and supporting staff. On average, women made up 41 per cent of the R&D workforce in 2021 with developing economies registering a higher percentage of female R&D staff than developed economies -—
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Notes

1. In this report, progress in target 9.2 is measured with reference to the base year 2005. This is in line with the practice applied in the monitoring of the Millennium Development Goals, where the baseline was set to the year 1990, thus ten years before the adoption of the Millennium Development Declaration -—
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   —-. The 2030 Agenda for Sustainable Development does not specify any base year for target 9.2.

References

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