What’s New in the New Industrial Policy in Latin America ?

1. What’s New in the New Industrial Policy in Latin America? Robert Devlin and Graciela Moguillansky New Thinking on Industrial Policy International Economic Association-World Bank Roundtable May 22-23, 2012 Washington, D.C.

2. Motivation

3. “Proactive Government and Industrial Policy is Back !!” Source: The New Yorker

4. Proactive Government and Industrial Policy Is Back in Latin America too! • Industrial Policy is not new to Latin America • Early 20th century • Inter-war period • Era of state-led industrialization 1950—1980 (Ocampo, 2006) • Results of era of state-led industrialization mixed and volatile. • Excessive protection • Lack of confidence in private sector (government as Evan’s (1995) “Demiurge”). • Lack of linkage between national plans and the budget. • Exports as tool for BOP but not learning and productive transformation • Over leveraging international bank credit and foreign debt • Fiscal and balance of payment crises • Authoritarian governments • “Lost decade”-- IP loses political legitimacy and Washington Consensus emerges • After the Washington Consensus Latin America’s is launching a new industrial policy for the 21st century and it must be done right this time.

5. Why Industrial Policy is Necessary for Latin America

6. What IP Can Address in Latin America • Mexico-Central America-Dominican Republic • Advantage of free trade access to US and EU • Growth and diversification of exports • Low, medium and hi-tech exports • But… • “Maquila” with low value-added • Little geographical diversification • Export concentration in undynamic products • South America • Bonanza of commodity prices… But…. • Colombia and Peru must upgrade to exploit US FTA. • Resource-based manufactures have low engineering content even compared to AUSTRALIA and NEW ZEALAND • Export concentration in undynamic sectors • “Deindustrialization” • Dependence on commodities prices=vulnerability

7. What IP Can Address in Latin America • Upgrade SMEs with potential for entering or climbing up international value chains. • Engage large domestic business groups • Incentives for more innovation and expenditure on R&D. • Incentives for more linkages with the domestic economy and SMEs. • Apply competition policy when they are asphyxiating local enterprise development. • The major challenge and opportunity of climate change • Give a strategic thrust to FDI attraction

8. Competitiveness Only Chile and Barbados in top 50 of Global Competitiveness Index……. ….but still weak in dynamic drivers of growth like education and innovation.

9. Global Competitiveness Index Latin America and the Caribbean 11 Extraregional Cases plus U.S. and China Source - World Economic Forum. Global Competitiveness Report 2010-2011. 139 countries.

10. Latin America’s Growth Performance is Comparatively Mediocre GDP Growth (%) Source: World Bank, World Development Indicators (2011) and Global Economic Prospects(2012)

11. What’s New in the New Industrial Policy?

12. What’s New in the New Industrial Policy? • Entirely different context for applying IP • Democratic politics • Culture of macroeconomic stability • Private sector is the lead agent of economic transformation; government is Evan’s (1995)“handmaiden”. • IP is for relatively open economies • Exports and diversification seen as tool for productive transformation. • Openness to FDI

13. What’s New in the New Industrial Policy? • Government IP are “walking before running”. • Most IP focused on enhancing competitiveness of existing goods and services (“IP in the small”). • Pressure of North-South FTAs • China and Asian competition • Exchange rate pressure in S.A. • IP “in the large” is large “light” • Not heroic bets distant from existing comparative advantage or learning capabilities.

14. Selection of New Industrial Policies In Latin America Source: Devlin and Moguillansky (2012) * Discontinued by current government

15. Colombia’s IP in the Large Red= new emerging world class sector Source: Ministry of Planning

16. What’s New in the New Industrial Policy? • Innovation is emerging as a component of IP: Brazil, Colombia, Mexico, Uruguay, Chile. • Many IP strategies have serious financial commitments. • Especially robust in Brazil (BNDES) and Panama (Canal revenues) • Chile and Colombia earmark mining royalties • Some rely too heavily on donors and IFIs (Peru, DR).

17. What’s New in the New Industrial Policy? • More attention to coordination and monitoring • IP linked to Public-Private Alliance Councils • Less “top down” • Aiming at Rodrik’s (2006)“social process=IP strategic policy outcomes”

18. Illustration of Private-Public Alliance Councils in Latin America (I) Source: Devlin and Moguillansky (2012)

19. Illustration of Public-Private Policy Alliance Councils in Latin America(II) Source: Devlin and Moguillansky (2012)

20. Alliance Councils Are Still AWork in Progress: Some Governance Problems (I) • Councils of government more than councils of state • Representation that are not fully representative. • Participation of important hosted MNCs is rare. • Plenaries can have too many participants for effective dialogue and problem solving. • Lack of engagement of minister of finance can dilute access to budget. • Inactivity of Councils erodes credibility. • Major players not discouraged in their efforts to bypass Council via bilateral lobbying.

21. Alliance Councils Are Still A Work in Progress: Governance Problems (II) • Councils do not have well-financed and independent admin/technical secretariats. • Governance structure and methodologies of dialogue do not overcome mistrust or indifference between government and business. • Low transparency • Poor communications between national and regional councils • Regional/ local counterpart councils have low technical capacities. • No independent evaluations of governance.

22. What’s Old in the New IP • Some remnants of the “old” IP • Lack of a professional civil service- the Achilles’ heel of IP!! • Lack of semi-independent statutory public executing agencies • Low fiscal space for the public sector action(“taxes”) • “Refounding syndrome” • Fragmentation and duplication of support programs • Little or no evaluation of the impact of policies and support programs • Weak regional/local counterparts • Still often middling enthusiasm of the private sector

23. Slightly Existential Issues • Hausmann’s (2008) “Bandwidth” and “Complexity” • The extent “open architecture” is the preferred form public-private alliances(PPA)? • Does lobbying serve well as a proxy for decentralized PPAs? • Should IP engage the big oligopolistic economic groups with risks of state capture? • To maximize their linkages to the domestic economy • Encourage them to do R&D and upgrade to new more complex activities.

24. Conclusions • Latin America needs IP to accelerate lagging growth and transformation. • The “new” industrial policy exhibits encouraging characteristics compared to the “old” industrial policies of 1950-1980. • PPAs are an enormous advance but their serious governance problems must be addressed. • There are remnants of the characteristics of the “old” IP that hinder the effectiveness of IP and must be addressed. • The lack of a very professional, capable and well-paid civil service is the Achilles' heel of the new IP. • Professionalization should be endogenous goal of IP. • Tax issue • The New IP is still a “work in progress”. Considerable room for improvement.

25. Thank You!!! Graciela.Moguillansky@gmail.com International Consultant Roberttdevlin@aol.com Communiqué International and Johns Hopkins SAIS