Turning health challenges into industrialization opportunities for developing countries
This article explains, in the COVID-19 crisis, the pandemic’s impact can be turned industrialization opportunities by building strategic synergy between health and industrial policies focusing on the relationship of these policies. The author emphasizes a two-pronged approach to recovery policies, one is to invest in innovation and manufacturing capabilities should be increased, and another is to identify and invest in strategic sectors that help safeguard sovereignty in times of temporary global value chain (GVC) disruptions. In the end, the author mentions three lessons to design the policies.
Turning health challenges into industrialization opportunities for developing countries
COVID-19 crisis offers opportunities to foster industrialization by strategically building synergies between policy areas such as healthcare and industry.
By Fernando Santiago
COVID-19 continues to challenge the world. The continued high risk of contagion notwithstanding, rapidly deteriorating economic conditions have intensified the urgency to reopen economies, particularly in developing countries. A two-pronged approach to recovery policies is recommended if the pandemic’s impacts are to be turned into long-term industrialization opportunities.
First, investments in innovation and manufacturing capabilities should be increased — the interplay between these two variables will allow to address complex global challenges. Measures to lure firms into retooling their activities and to switch their manufacturing lines to produce critical COVID-19 supplies offer a temporary solution. In the long run, firms will only be able to develop the necessary flexibility if they retain production and innovative capabilities, which result from long-term investments in science, technology and innovation (STI).
This recommendation resonates with debates around fair access to a COVID-19 vaccine in the future. Recent trends indicate waning domestic vaccine production capacities in developing countries. Moreover, the figure below illustrates that despite the significance of health-related research and development (R&D) relative to gross expenditure in R&D in developing countries, particularly in low income countries and in Africa, investment gaps in relation to the overall R&D/GDP ratio are substantial when compared to high income countries.
Improved interaction in innovation systems would help to address urgent health problems.
Social and industrial development outcomes converge in the healthcare industry. According to Mackintosh and Tibandebage (2016) for example, the healthcare industry is both a locus of industrial growth and a major service industry; its development drives investment, skilled training, employment and incomes, which together with public procurement, contribute to domestic demand. The more this demand connects to domestic producers, the higher the possible spillover effects on non-health industrial and services sectors.3 The healthcare industry offers export potential as well as the possibility to springboard other activities, for example, health tourism.
Health-related R&D drives economic dynamism through pharmaceutical and related industries and social wellbeing via medicines and a wide range of other medical supplies and equipment. Pharmaceuticals is among the most research-intensive activities in OECD member countries — which still account for the largest share of global R&D expenditure — behind electronics and optical products, and air and spacecraft.
How does healthcare policy relate to industrial policy?
Shadlen and Fonseca (2013) identify two main channels through which interventions in the health sector can foster industrial development and in the process, increase the effectiveness of health policies.
The first is demand-driven, which includes a domestic component and one related to external demand. From the domestic perspective, government commitments in health, which often translate into public procurement for essential health supplies, may reveal weaknesses and deficiencies in manufacturing — of pharmaceutical products, for example — and incentivize capability-building in sectors where demand is strong. A disconnect between procurement and local industry needs and capacity may explain some of the challenges South Africa’s pharmaceutical industry faced early in this decade; the local productive capacities were insufficient to meet domestic demand for generic medicines, opening the door to cheaper imports of both inputs and final products, particularly from India.4 Expansion in health insurance coverage and changing epidemiological profiles in developing countries will continue to driving demand in the healthcare industry, with direct implications for productive capacities in developing countries.
India’s strategy has been to tap into external demand to boost the local pharmaceutical industry’s development. Price controls and global efforts to ensure affordable, quality medicines have resulted, among other things, in raising global demand for generic drugs, and incentives to increase generic drug production, particularly in developing countries, and more concretely, those in Asia. India has capitalized on its strategy by actively promoting the local industry, including protection against imports, introducing aggressive incentives for local active ingredient manufacturers, strategic use of intellectual property right regulations, an open, export-orientated strategy and increasing attractiveness for foreign direct investment (FDI) in both manufacturing and R&D. In the post-COVID-19 world, India and other countries with advanced productive and innovation capacities have the opportunity to continue tapping into the growing demand in the healthcare industry, entering new and more complex segments of the global market. Targeting the demands of the immediate neighbourhood may offer alternatives to countries where domestic markets fail to provide the scale needed to make the production of pharmaceuticals an attractive business. Countries such as Cuba could leverage on exports of medical services to compensate for the sugar industry’s declining dynamism.5
The second channel is regulation-induced. Effective regulations for the healthcare industry aim to ensure safe, efficacious, good quality and affordable delivery of healthcare. At the same time, regulations set parameters for domestic producers to operate and standards for trade, and even ethical and acceptable practices for research in the medical sciences to contribute to socioeconomic progress. Accordingly, sanitary policies can uncover mismatches between what firms require to participate in the market, producers’ existing capacity levels, and the necessary government measures to address this mismatch.
Long-haul regulatory reforms during the late 1990s and early 2000s shaped the pharmaceutical markets in countries such as Brazil and Mexico, strengthening the segment of generics and generally reducing the burden on budgets dedicated to the procurement of essential medicines. After more than two decades of reforms in the global intellectual property rights regime aligned with global trade principles, China and India have been able to consolidate their pharmaceutical industries through substantial export capacities; they are among the largest global suppliers of active ingredients and generic drugs. Horner (2019) suggests that sustained dynamics of India’s pharmaceutical industry requires stronger regulation in areas such as product quality, environmental impact, prices of and access to medicines, compliance with patent laws and the regulation of clinical trials. Improving the integration of policies targeting health and industrial sectors would help countries such as Kenya or Tanzania enhance effective healthcare services provision and boost manufacturing development to locally source essential health supplies.67
Lessons for policy design
Identifying niches and capitalizing on opportunities to upgrade in GVCs. Gerefi et al. (2019) assert that Costa Rica has managed to capitalize on an FDI-driven industrial development strategy, targeting high-technology industries such as medical devices.8 The strategy has successfully upgraded an industry that consists of a large and diversified base of multinational firms operating in multiple end markets, and has transformed the medical device industry into the country’s largest and most dynamic high-tech export cluster. While backward linkages remain modest at around 9 per cent, the local value-added content of exports increased by 32 per cent between 2012 and 2015. According to the authors, upgrading was made possible through the efforts of Costa Rica’s Investment promotion agency, CINDE, and through attractive investment incentives through free trade zones, allowing for the entry of several foreign firms into increasingly complex segments of the GVC. Additional measures included investment in highly qualified human resources and a high receptiveness of education institutions to address industry-specific training needs ranging from (re-)training certifications to postgraduate degrees covering technology, regulatory affairs and other fields. Authorities quickly filled infrastructure and human resources gaps, and assisted in integrating foreign investors into the local business environment.
Strengthening policies to foster industry-academic interactions to innovate. A major barrier for developing countries to turn health challenges into industrialization opportunities is the lack of interactivity between firms and research organizations as a driver of pharmaceutical innovation. In the case of Mexico for example, where diabetes mellitus represents a pressing national health problem, a substantive national research and productive agenda around this disease would require funding and other incentives to bring together public and private healthcare providers, research organizations and firms to develop new drugs and other products to tackle the disease. Natera et al. (2019) suggest that to overcome the traditional focus of public research funding on high quality scientific publications over the development of concrete applications, a reorganization of peer review processes is needed; for example, to allow broader stakeholder participation to include actors oriented towards implementation of research results.9
Strategically draw from international collaboration. The sudden rise in demand for critical health supplies for COVID-19 case management, including personal protective equipment, diagnostics and medical devices, has motivated international collaborative, knowledge-sharing initiatives to mobilize local productive capacities in both developed and developing countries, one example being the Tech Access Partnership. In parallel, efforts are underway to improve reference frameworks and roadmaps at regional and country levels, such as the collaboration between UNIDO, the West African Health Organization (WAHO) and the Economic Community of West African States (ECOWAS) to facilitate compliance with international standards of good manufacturing practices (GMP). This ensures that pharmaceutical production in the region meets strict international quality standards to improve its long-term viability. There is a window of opportunity to tap into the pharmaceutical industry, which has been deemed a high priority by the Third Industrial Development Decade for Africa (IDDA III) operationalized by UNIDO.
Developing countries have the opportunity to turn the COVID-19 crisis into a renewed commitment to foster innovation and industrialization – as stipulated in SDG9. Recovery should include active innovation and industrial policies, with explicit interaction between these two policy domains. Recovery strategies should aspire to grant populations better chances at a more inclusive and sustainable future, one where they are not forced to trade economic prosperity for health security.