What’s new in the new Industrial Policy in Latin America

Robert Devlin and Graciela Moguillanski

Comment by Carlos Alvarez OECD Development Centre

Why industrial policy in Latin America?

Latin America has experienced high rates of growth but,

• Strongly linked to commodity prices and complementarities with China , and consequently vulnerable.

• Not accompanied with significant increases in productivity.

• Without export diversification

Recovery after the crisis is stronger in countries that are more complementary with China

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.80.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.243567211815262

0.180890415483189

0.148395988797755

0.154286412784024

0.159081561890159

0.113245716710491

0.0272638753651411

0.0944918219756865

0.0637187913445604

0.277786636900016

0.2358522594183170.230798151484296

0.0158222981631782

Coefficient of comformity (higher values = more competition with China)

Recovery

sin

ce p

re-c

risi

s peak (

% o

f peak l

evel)

Vulnerability to China’s performance.

Weak Productivity Growth.

Annual average trend growth of GDP per worker 2000 - 2008

Argentina Brazil Chile Colombia Mexico Peru Venezuela

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%Total factor productivity Physical capital Human capital

A different scenario for Industrial Policy.

The current global scenario offers opportunities for catching up (open markets, expanded knowledge diffusion, Global Value Chains, Knowledge Process Outsourcing, etc.)

But , policy makers in LA face constraints in their policy options:

• Open Economies (protection is not an option, at least for Small Countries)

• Irruption of China in the world trade, with very aggressive catching up policies.

• Rents (substantial increase in commodity prices attracts businesses and local talent in search of a portion of revenue windfall).

• Reduced base of manufacturing companies.

This is not a scenario in which weak industrial policies can succeed

Effective New Industrial Policy requires• Strategic coherence between public and private

sector.• Solid agencies endowed with skilled personnel.• Alignment between public organizations.

But also,

• Adequate budgets that finance high power incentives,

and Strong political support.

Latin America: Half-hearted Industrial Policy

• Small budgets impede the establishment of strong incentives.

• Weak performance of critical input markets (long term financing, training).

• Timid movement towards sector or cluster based programs.

• Scarce use of high power instruments: Procurement, Mission Oriented Research, Sectoral Innovation Programs, Selective Investment Attraction. Weak policy Integration.

Conclusions

• Based on recent advances, Latin America needs to move decisively towards a next stage in Industrial Policy.

• It should channel a part of the rents of Natural Resources to catch up in promising sectors.

• Strengthen its industrial policy framework by including in the mix, a sectoral or cluster approach with high power instruments that complement horizontal instruments.