Carlota PerezCentennial Professor at the London School of Economics (LSE), UK Professor of Technology and Development, Tallinn University of Technology, Estonia

JICA/IPD, Jordan, May 2014

THE NEW CONTEXT FOR DEVELOPMENTAROUND NATURAL RESOURCES:An opportunity for Latin America(and other resource rich countries)?

Circumstances have significantly changedsince our ideas on development evolvedin the post-war period

In the character of energy, materials and food markets

In the potential for innovation in developing countries

In the interests and behavior of global corporations

In the influence of environmental factors asboth obstacle and challenge

BASIC ARGUMENT:

And in the level of awareness of the role of innovation in growth and development

What determines the synchronicity?Development opportunities are a moving targetdepending on the nature ofsuccessive technological revolutionsand on their stage of diffusion

It’s no use trying to imitate current successesthey were achieved with past opportunitiesTomorrow’s successes dependon anticipating the future todayBeware of developing policy theories using only data from past decades?

A historical observation: Fast growth and catching up processes tend to cluster in certain regions or countries that move in similar directions for a certain period

• The US and Germany caught up with Britainfrom the 1870s in the Age of steel and heavy engineering

• Australia, New Zealand, Argentina, etc. made a leapwith counter seasonal trade made possible by steamships and London funding

• Western Europe moved to mass consumptionwith the mass production revolution (following US)

• Latin America and Asia grew with protected ISIwhen mass production matured (Africa came late)

• Japan and the Four Tigers took the double technological opportunity of the paradigm shift to ICT

• China (the BRICs?) took the globalisation “train”

SOME OF THE OBSERVED OPPORTUNITIESof different magnitudes and outcomes;of single countries or groups of them

Could shifting opportunities explainOcampo’s “truncated convergence”?

And what different countries getfrom using a particular opportunity is not necessarily the same outcome

Both Latin America and the Asian Tigersused the ISI opportunity(when the industries in the Northwere maturing and facing saturated markets)

TAKING ADVANTAGE OF EACH OPPORTUNITY

DEPENDS ON PREVIOUS CAPABILITIES

(technological and social)

ON POLITICAL AND ENTREPRENEURIAL WILL

AND GOOD TIMING

METHOD Import parts instead of finished products. Set up tariff barriersAccept low productivity and high prices to increase employment

FOCUS Final stage of fabricating (assembly) industries for the domestic market (the mature products of ‘Fordism’). In practice little technological learning and rare innovationBut, together with multiplier effect (suppliers) created its own demand

LEARNING In the complementary activities and the processing industries:Construction, infrastructures; transport, commerce, distribution, banking, etcManagement of large and small firmsProcessing industries: food, beer, cement, paper, bottles, metallurgy, etc.And previous learning continued (in some cases intensified) in natural resources: mining, oil, agriculture, livestock, etc.

When world conditions changed and protection was lifted, the model collapsed

The ISI opportunity for jobs and growth in Latin America from late-50s to late 70s

SO ISI ACTED AS THE “STARTER ENGINE” OF ECONOMY WIDE (LIMITED) LEARNING

Mature industriesin the advanced world

looking for market growth

“Third World” governments looking for paths to development

WHILE IT WAS ADEQUATE FOR THE CONTEXT, IT ACHIEVED GROWTH

THE ASIAN LEAP TO DEVELOPMENT BEGAN WITH ISI, BUT SOON TOOK ADVANTAGEOF THE WINDOW OF OPPORTUNITY THAT OPENED FROM THE 1970s WITH ICT

They made alliancesto produceelectronics, electrical, electro-mechanical goods and textile-clothing

They took advantage of low-cost labourAND MADE HUGEEFFORTS IN TRAINING AND EDUCATION

When the ICT revolution came, they were ready to make the leap

NOW THEY ARE ABLE TO INNOVATE THEIR WAY UP

They specialised in mass fabrication (assembly) for export markets

A ROUTE FOR A SOUTH AMERICAN (double) LEAP TO DEVELOPMENT:TAKING ADVANTAGE OF THE WINDOW OF OPPORTUNITY OF THE 2010s?

To make alliances to produceenergy and materials (basic and special, natural and synthetic, macro and nano)and biological products (traditional and advanced, ecological and biotechnological)adding technology and innovating up and downstream

When the next revolution comes (possibly bio, nano, new and green materials, etc.) the economies can be ready to make the leap

WOULD THAT BE POSSIBLE?

To specialize in the PROCESSING industries around natural resources for export markets

The ideas about the role of natural resources in development

have changed over time

End 19th Century and early 20th = ADVANTAGE Major asset to favor and finance development (US, Canada, Australia, New Zealand, Argentina, Scandinavian countries)

Post WWII = DISADVANTAGE 1940s-50s: Increasing advantage goes to manufacturing industry. Price Scissors (Prebisch 1945, 1951; Singer 1949)1970’s: Dutch disease (The Economist 1977, Corden 1982)1980s and 1990s: “Resource curse” (Sachs and Wagner 1995, Auty 1995)

2000s = COULD THEY BE AN ADVANTAGE NOW?

Price level and trend? Probably higher (demand greater than supply)

Volatility? Continues

Corruption? Still a problem

Nature of markets? From mainly commodities to hyper-segmentation(while much of manufacturing and services has been commoditized). Long tail in products long tail in materials

Market growth? Strong in emerging countries (Engels law prolonged, if full globalization occurs). New billions to middle class need to be fed

Technological dynamism? Much greater, facilitated by ICT, spurred by differentiation in demand and increasinglyshaped by environmental and health concerns

Type of innovation? From mainly process innovation (to lower the cost of homogenous products and to overcome local limits) to special product innovation and customization with higher profit margins and possible barriers to entry

REVISITING THE NATURAL RESOURCES ISSUE. WHAT HAS CHANGED?

Behavior of MNCs? From enclave with affiliates to global networks with suppliers and partners (much greater interest in transfer of technology to ensure final quality)

From cartel-type behavior (or market control) to East West competition for access to resources, creating conditions for a stronger negotiating position

Access to information? Significantly enhanced

Access to markets? Much greater variety of distribution outlets and transport systems for different quantities and qualities, all enabled by ICT

Initiating local production? From domestic to global markets; protection difficult; possession of natural resources becomes important advantage; Asia has become the factory of the world (huge advantage in experience and labor costs)

Nature of markets? From homogeneous (three tier) to hyper-segmented diversity, adaptability, special products (long tail). Coexistence of multiple technologies. New price-scissors between standard and “long tail” products?From supply-defined industries to user-defined sectors

REVISITING THE POTENTIAL FOR TECHNOLOGICAL CATCHING-UP

Natural endowment? Abundance and variety of resources

Population density? Much lower than in Asia

Technological capabilities? Tradition and learning in NR activities and in the processing industries: strong in agro-industry but also chemistry and metallurgy

Infrastructures? Relatively well developed physical and business support infrastructure: ports, roads, electricity, water, telecom, banking, transport, construction industry, etc.

Social capabilities? Educated middle class with organizational and business experience (basis for improvement)

Main limitations? Unchanging traditional power structures; high levels of poverty, corruption, poor education, etc.

SPECIFICITY OF LATIN AMERICA (with significant differences between countries)

Can these countries use Asian markets to achievetechnologically dynamic and inclusive growth by innovating around NR?

The potential for technological dynamism for the innovation system would driven by the changes occurring

in the market context

NR-Production

Equipment Inputs

ServicesRD&E

Investment (incl. exploration)

Processing A1

Processing A2Processing B2

Packaging, branding, etc.

Transport, marketing, distribution

Processing B1

A successful strategy would need to encompassTHE WHOLE NATURAL-RESOURCE-BASED NETWORK

from capital goods and services to processing and delivery

THE NATURAL RESOURCE INDUSTRIES WITH THEIR INNOVATION NETWORKS

Success depends on continuous improvement of technologies, companies, products, human capital and networks

• Multiple engineering services Design, construction, adaptation and maintenance

• Software and systems services• Capital goods: Equipment and instruments

Design, construction, adaptation, installation, compatibility, etc.• Laboratory services

Quality control, evaluation, measurement, certificates, etc.• Conservation and packaging

R&D, engineering, design, production, services • Transport, marketing and distribution

Standard, adapted and specialised• Technical service to users• Market intelligence• R&D

Improvements and new products• Patent lawyers; contract negotiation • Training and education of specialised personnel• Etc, etc.

• Mining/Metallurgy• Chemicals, petrochemicals• Pharmaceuticals• Custom materials • Livestock• Agriculture, hydroponics• Agro-industries• Biotechnology• Fisheries, aquaculture• Forestry, paper• Ceramics, glass• Packaging• Energy/Electricity• Refining • Nanotechnology• Tourism• Etc.

EACH INCLUDING COMMODITIES AND SPECIALITIES

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Challenges toovercome:

Diminishing quality of deposits, lands, etc.

Greater difficultyof access

Limited andimmobile supplyof different qualities

Economies of scale in processingEtc.

MARKET CONTEXT

Globalisation of production

Outsourcing-off-shoringand corporate social responsibility

Competition between Chinaand the West for scarce resources

Prospective change in relative costs(energy, materials, transport, labour)

favouring processing in situ

MARKET REQUIREMENTS

Segmentation and differentiationImportance of qualities

(custom materials)Public opinion + environmentPro-recycling and renewables

vs. pollution

ICT

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Ease of distancecoordination

Ease in handlingvariety at all levels

Drastic reduction intime and cost of

innovation andadaptation

Biotech, nanotech, applications

to NR activities

Green chemistry

Etc. etc. etc

DISTRIBUTION

PACKAGING

PROCESSING (1,2,3…N)PRODUCTION

INVESTMENT (Incl. exploration when relevant)

EQUIPMENTINPUTSSERVICESRD&E

NATURAL RESOURCE-BASED NETWORK

The forces driving innovation in the natural resource networks

THE PROCESSING INDUSTRIES require increasinglyqualified personnel

BUT THEY ARE NOT LABOUR INTENSIVE

HOW CAN GROWTH BE ACHIEVED WITH SOCIAL EQUITY?

TAKING THE LIMITS INTO ACCOUNT

Latin America has a very serious income distribution and employment problem

TWO DIFFERENT YET INTEGRATED PARTS OF THE ECONOMY

TWO DIFFERENT AND COMPLEMENTARY GOALS

Economic growthand global positioning

Full employment and well being

for all

interconnected specialised ‘local’ economies (clusters)

ENGINES OF GROWTH

Constantly upgraded production networks

around natural resources

Objective: To raise the quality of life of all inhabitants

Objective:Growth and generation of foreign exchange

COMPETITIVE TECHNOLOGIESFORGLOBALMARKETS

Differentiated development of each part of the territorybased on the local productive vocation, identified or promoted

FOR DOMESTIC OR FOREIGN MARKETS

A DUAL INTEGRATED MODEL: TOP-DOWN AND GRASSROOTS-UPwith converging processes of growth and innovation

INFRASTRUCTURE, FUNDS, ENABLING INSTITUTIONS AND ‘HUMAN CAPITAL’

An active State facilitating and promoting local initiative

Achieve growth now taking advantage of the current window of opportunity for natural resource producers

The promise of this particular strategy is not much greater than that of ISIbut it can be ambitious when taking paradigm shifts into account:

Prepare to make a leapin development with the next technological revolution

by developing capabilities,companies and global networks in the sectors of the future(biotechnology, nanotechnology,bioelectronics, new materials?)

That is what Asia did –without planning it– with the ICT revolution

Yet it requires intense efforts in training, education, RD&Eand innovative cooperation at all levels and in all stages

DOES LATIN AMERICA HAVE THE SOCIAL CAPABILITIES FOR THIS?

A LEAP IN DEVELOPMENT IN TWO STAGES

Can this strategy be appliedby other natural resource producers?

Advantages will probably go to:

• To those who have already acquiredbasic technological and social capabilitiesfor producing, negotiating, networking and innovating

• To those possessing the resourceswith more dynamic demand and higher prices

• And to those with first mover advantages

Yes. The most likely is that there will be competition among producers as well as among the companies and countriesthat require the resources

The diversity of resources will result in a variety of competition conditions

Prices?

Corruption?

Dutch disease?

Climate change?

Environmental policies affecting demand?

Biotech and other radical innovation risks?

Over-exploitation of resources?

Political resistance?

Etc

THE OBSTACLES AND THE UNCERTAINTIES

All strategies face different obstacles and uncertaintiesSuccessful strategies are about facing themwhile taking advantage of the opportunities

THE GREATEST RISK IS MISSING THE BOAT!