With a few exceptions, industrial policy has become an obsolete term in Latin America and the Caribbean, as the region has opened its markets and implemented structural reforms that emphasized market liberalization and macroeconomic stability. Shedding the failed industrial policies from the past made sense in the 1980s and 1990s. The decades of import substitution industrialization strategies had built up inefficient, corrupt and fiscally unsustainable policies and state enterprises. But in the current global economy, most countries in the region remain unable to move upwards from the low-value end of global production chains. If Latin America is seeking to sustain the rise of its middle class and become a more dynamic player in the global arena, industrial policy levers might be the missing piece in the region’s policy toolbox.
Latin America and the Caribbean is fairly integrated with the global economy. It accounts for 8% of global economic activity and 5% of global exports of goods and services, and trade openness makes up for about 44% of the region’s GDP. But while specialization in natural resources sectors provides the basis for important gains from trade, the economies of the region are widely exposed to price fluctuations in commodities markets such as corn, soy, copper, and oil. What’s more, their participation in global value chains is generally lower than in other regions.
By one measure, for example, exports originating in Asia and the European Union use 12% and 15% more foreign value added, respectively, than do exports originating in Latin America and the Caribbean. This means countries from these two competing regions are more involved in sequentially linked production processes than are countries in the Western Hemisphere.
To address these challenges, and to move toward other tech-intensive sectors, higher-return activities require more proactive policy measures, which should aim at establishing a base for wider industry linkages and more sophisticated production.
Hard and soft policies
Industrial policies have experienced a revival in recent years. Economists have recognized their power in driving broad economic growth and development. A number of countries have successfully implemented a series of policies and state interventions aimed to re-engineer the economic and industrial structure of the country. Asian economies famously jumped up the manufacturing value chain in the 1960s, as Japan, South Korea, and Japan moved gradually from textiles to the auto industry, and then onwards to electronics production. In the United States too, industrial policy has played a key role in the development of now-widespread technologies, including the internet, GPS, artificial intelligence, and nanotechnology.
Since the early 2000s, the revival of industrial policy has emphasized soft policy options, aimed at promoting a number of interlinked activities that are likely to have a larger reach, and which operate irrespectively of specific sectors. Colombia, for example, is implementing an institutional framework to enable structured public-private dialogue and build a comprehensive competitiveness agenda. Chile, meanwhile, has emphasized a combination of loans to small businesses, subsidies to new exports, and an innovation program. These efforts come in handy to entrepreneurs and firms in a variety of sectors.
More heavy-handed industrial policies have a role too. Despite having earned a bad reputation in the heyday of non-interventionist policies, there is still room for developing countries to find the right balance between hard and soft, and between sector-specific and horizontal industrial policy options.
Bangladesh, though outside the hemisphere, is a useful model. Its textile sector proved a successful starting point for the development of its manufacturing capacity – it is now the world’s second-largest garment exporter. But it is one of the few low-income countries that has managed to build a pharmaceutical industry. It did so through a combination of targeted support mechanisms, including a skills development program, both to attract and retain investment and to encourage local firms’ participation. Closer to home, Chile has also implemented more specific interventions to foster the development of its salmon and blueberry industries. In both these cases, policies play the role of pushing markets in a direction they wouldn’t otherwise go, working alongside businesses to steer them to more productive sectors.
From innovation to transformation
Newer ideas on industrial policy emphasize innovation as a key driver of productivity and economic growth. Numerous Latin American countries— Brazil, Colombia, Mexico and Chile—have created innovation ecosystems, involving investments in research and development and improved access to finance, to improve productivity and foster tech-intensive industries. But these individual levers alone don’t have overarching effects throughout an economy.
Despite this, policymakers seeking to transform their country or regions’ economic structure should not obsess over the desired result or the grand vision about a particular kind of industry. Indeed, several attempts to replicate the Silicon Valley model have failed, as there is more to it than proximity and corporate culture.
Industrial policy has a long history, and while it has undoubtedly worked in key countries and in particular sectors, it’s prone to being botched by politicians and business leaders. In
a context of weak institutional development, however, Latin America should pay particular attention to coordination and monitoring processes, matching policies and support against performance, to avoid sustaining inefficient industries and ensure long-term sustainability.
Industrial policies that led to the development of green energy, Princeton Professor Dani Rodrik explains, were successful not because governments singled out specific sectors to foster, such as solar energy, but rather because they promoted cross-sectoral work to address a broader goal, such as addressing climate change. Indeed, Rodrik argues that industrial policy should be seen as a discovery process, whereby public and private actors collaborate to identify underlying costs and benefits, and overcome the uncertainty and lack of knowledge about which sectors of industry are best to invest in.
Jumping on the industrial policy bandwagon is risky, but it is precisely in countries with weaker institutions that it is most necessary. If Latin America and the Caribbean is to finally make a great economic leap, it might be worth a try.