PTPR-PLG OF PRODUCTION TRANSFORMATION POLICY REVIEW PEER LEARNING GROUP MEETING

KEY OUTCOMES

In cooperation with

17 May 2017 Paris, France

The Château, Room E 2, rue André Pascal Paris, France

Contacts: Annalisa Primi, Head, Structural Policies and Innovation Unit & OECD Initiative for Policy Dialogue on GVCs, Production Transformation and Development, OECD Development Centre Email: annalisa.primi@.org

Kim Millin, Assistant, Structural Policies and Innovation Unit, OECD Development Centre Email: [email protected]

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TABLE OF CONTENTS

PTPR-PLG OF CHILE ...... 1 PRODUCTION TRANSFORMATION POLICY REVIEW ...... 1 PEER LEARNING GROUP MEETING ...... 1 KEY OUTCOMES ...... 1 CONTACTS: ...... 1 1. Background information ...... 3 2. Chile is looking to diversify its economy to sustain growth and wellbeing ...... 3 3. Anticipating change is paramount to better prioritise actions ...... 5 4. Advancing in decentralisation requires capacity building, and performance-based contracts10 5. Managing sector specific programmes: start small, experiment, and identify quick wins .. 13 6. Next steps in the PTPR of Chile ...... 19

Tables

Table 1. Diversifying the Chilean economy: opportunities and challenges ...... 9 Table 2. Increasing the place-based approach in the Chilean transformation strategy ...... 13 Table 3. Preliminary assessment of the Transforma Chile strategy ...... 18

Figures

Figure 1. Transforma Chile: priority areas ...... 15

Boxes

Fostering private sector development: lessons from JICA ...... 17

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1. Background information

1. The Production Transformation Policy Review Peer Learning Group Meeting (PTPR-PLG) of Chile was hosted back to back to the 8th Plenary Meeting of OECD Initiative for Policy Dialogue on Global Value Chains (GVCs), Production Transformation and Development by the OECD in cooperation with the Chilean Production Development Corporation (CORFO), the Ministry of Foreign Affairs of Chile, and the Ministry of Economy of Chile, on 17 May 2017 in Paris, France. The PTPR of Chile is carried out in cooperation with UNCTAD and ECLAC.

2. The PTPR Peer Learning Group (PTPR-PLG) is set up as part of the review process. It is open to member countries of the Initiative as well as to other countries and actors that the target country wishes to invite. The PTPR-PLG meets once or twice during the PTPR process and at least once back-to-back with the Plenary Meeting of the Initiative. The objective of the PTPR-PLG is to discuss three key policy issues that emerge during the PTPR process that can benefit from the experience and views of other countries and regions. It also brings the possibility for a wider group of countries to benefit from the learning process of the PTPR.

3. The PTPR-PLG of Chile counted with the participation of 40 high level representatives, including high level delegations from 15 governments (, Canada, Chile, , Colombia, Costa Rica, Dominican Republic, Egypt, , , Panama, Paraguay, Peru, , , and ) and representatives of leading multinationals and business associations from Chile (BHP Billiton), Côte d’Ivoire (Ivorian Association of Private Enterprises) and (NIR (International Council of Swedish Industry)) and leading scholars from China and South Africa. It also counted with the participation of 5 International Organisations, three of whom are members of the Advisory Board of the Initiative, UNCTAD, UNIDO and the European Commission.

4. The one-day PTPR-PLG featured an initial presentation of Chile’s current situation and vision for the future, as well as three sessions, each addressing a key political economy issue that had emerged during the initial phase of the PTPR of Chile. The first session focused on how to prioritise by increasing governments’ anticipatory capacities; the second session focused on how to increase the role of regions in economic transformation strategies and the third session addressed the issue of how to effectively manage competitiveness programmes that address specific industries/sectors.

5. The following paragraphs summarise the key outcomes of the meeting.

2. Chile is looking to diversify its economy to sustain growth and wellbeing

6. Chile has been highly successful in maintaining macro-economic stability and in setting up investment frameworks and trade agreements with multiple partners. And over the last decade it has made progress in increasing the quality of life of its citizens, but inequality remains high and economic opportunities are not equally shared across society. In this context, the persistent dependency on natural resources, and the associated vulnerability to exogenous factors are challenging the capacity of the country to respond to the aspirations of its growing middle-class and its demands for better jobs, education, health and other services.

7. Chile has a long history of natural resource dependency and has, since the 1960s, experienced a process of diversification from natural resources. Mining represented 80% of Chilean exports in the 1960s. Today, and copper-related products alone account for 51% of national gross exports. Four main factors can be identified as major divers of that process:

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i) Public investment for the provision of public goods. Since the 1960s, Chile has established public institutions in charge of economic development, invested in infrastructure, and in human capital, through the Chile-California programme to train skilled workers for example;

ii) The capacity of public institutions to scan what was happening in more advanced countries. Chilean institutions invested in learning from the experience of other countries, promoted cooperation programmes focused on technology transfer and implemented targeted policies for catching up. Fundación Chile for example, has been capable to scan what was happening abroad and it has been effective in bringing these experiences to Chile, as for example in the industry in Scotland and and in the industry in Finland;

iii) The opening of the economy since the 1970s, which facilitated exports and learning from foreign companies;

iv) The democratisation process, which reduced the risk premium and created incentives for productive investment.

8. Despite these successes, Chile’s diversification is still to be achieved. The country’s current challenges are to sustain growth, reduce its vulnerability to exogenous factors (including the volatility involved with natural resource-based production), and transform new technologies into opportunities for all its citizens. Despite some progress, the country still lags behind frontier countries in terms of innovation and technological capabilities. In addition, the country is suffering from a productivity problem in most industries. The reasons behind the productivity gap in Chile differ by industry (e.g. when compared with more advanced countries such as Sweden, Chile’s copper mining is hindered by rising production costs caused by a need to shift towards underground extraction, combined with high energy costs and low output per worker, even in automated processes). A common reason behind this productivity gap is a poor science, technology and innovation network, which slows down possibilities of cooperation in problem solving. In addition, there is the challenge of the overexploitation of natural resources, as is the case in the fishing and salmon industries, where resource depletion is particularly severe.

9. Since 2005, Chile has prioritised innovation as a key driver to sustain growth and increase competitiveness. Public policies have suffered from discontinuities but have brought about some positive results. The cluster development programme in mining has been reasonably successful thanks to the commitment of the private sector and to the incentives for start-up creation. Other efforts were made, to facilitate the creation of partnerships with foreign actors, and to support competitive research in Chile through the establishment of Centres of Excellence. Yet two major challenges persist: i) creating incentives for the private sector to invest in risky activities, including innovation projects, and ii) creating the skills necessary to compete in the future. Of the government-funded higher education trainings, only 15% were dedicated to STEM areas, while the rest went to social sciences. This mismatch between the government-funded training and the needs of industries is a serious challenge that needs to be overcome.

10. The reduction in copper prices from 4.58 USD/lb in February of 2011 to 1.94 USD/lb in January of 2016 (with prices currently fluctuating around 2.5 USD/lb) is pressing the country to identify new sources of growth. These imply not only addressing the productivity gap, but also identifying ways to enable the creation of new firms and the development of new capabilities and economic activities in the country, while benefiting from global opportunities, unique local assets and new technologies.

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11. The proposals for diversifying the Chilean economy are multiple. On the one hand, there is a call for advancing the agenda of red tape simplification (some successes include the 2013 law for creating a business in one day), enhancing support for starting and scaling up businesses, and strengthening skills’ development, especially in technical and vocational training. On the other hand, there is an open debate on what Chile could do beyond fostering competitiveness and improving productivity in existing industries. This implies a more ambitious agenda that requires not only a vision (currently put forward by the Ministry of Economy in the 2014 National Agenda for Productivity, Innovation and Growth), but also prioritising medium and long-term actions. These actions should take into account potential scenarios for the future and effective buy-in from all stakeholders, including local communities and domestic and foreign companies, and coordination between policies for innovation, industrial development and trade, and adequate financing.

12. The productivity, innovation and growth agenda 2014-18 builds on past achievements, and has identified 47 reforms to diversify the economy and increase growth in a sustainable way. The agenda includes reforms to strengthen entrepreneurship, increase financing for R&D, and modernise the state. It also includes strategic programmes in areas where Chile has some comparative advantages and in which there are global opportunities, including big data and the Internet of Things (IoT), climate change, electro-mobility, and health and functional .

13. In this context, the PTPR of Chile is perceived as a useful exercise to:

 Assess Chile’s strategy and identify recommendations to move forward

 Set up a process of open consultations and dialogue with key stakeholders in the country, to support consensus building on critical issues for national interest in the short and medium term

 Foster peer dialogue and learning from other countries through the peer process and through the PTPR PLG

 Offer a space for medium-and long-term review of the Chilean strategy through the OECD Initiative for Policy Dialogue on GVCs, Production Transformation and Development

3. Anticipating change is paramount to better prioritise actions in a fast-changing global economic landscape

14. Identifying priorities for an economic transformation strategy is a challenging task. And even more so in a fast changing global landscape as the one we currently live in. Selecting the areas on which to focus and mobilise resources is a major challenge for all countries. Time, human resources and financial constraints, as well as the key issue of how to build a shared vision for the future need to be considered.

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How to prioritise?

How to diversify the economy? Market Production & opportunities - New activities? innovation - New industries? system - Specialisation or diversification within Endowments existing industries?

SHARED VISION FOR THE FUTURE

15. In Chile, there is no formal process or institutionalised space for scenario building and foresight to inform strategy setting. Back in the 1960s, Chile had a Ministry of Planning that, to certain extent, played the role of scanning for possible futures to define scenarios and plan economic development policies. However, over time, that Ministry was assigned to social development, and its incipient capability of scenario setting was lost.

16. While some initiatives are looking into future trends, there is no systematic way to integrate these visions into a shared vision and concrete policies. Since 2005, when Chile prioritised innovation as a key driver to sustain growth and development, the country made up for the lack of systematic institutional capacity by contracting external consultancies and leveraging on external experts and experience. In 2008, Chile took a step, coordinated by the National Council for Innovation and Competitiveness together with BGC, followed in 2014 by a new effort coordinated by CORFO, to look at potential technology trends in key areas relevant for the country. The main trends, analysed to identify opportunities for economic diversification in Chile, included digitalisation, IoT, electro-mobility, solar technology, and the emergence of new consumer demands that give a premium to healthy and sustainable food products. These steps served as basis for identifying key road-maps for the future in selected priority areas. The National Productivity Commission, a public-private consultation body created in 2015, is looking for options to scale up and increase value added from mining. The Future Commission of the Senate, set up in 2012, discusses future trends and identifies ways to better inform policies with national and foreign experts. The Chilean National Council for Innovation and Development (CNID) advises the Presidency on innovation opportunities through the elaboration of a strategy for the future (currently with an horizon 2030), focusing on big national and global challenges where Chile can leverage on its unique assets (water management, solar energy, and Smart and Green mining, to name a few). Table 1 summarises consensual and controversial issues in the diversification debate, with a view to identify what role increased governments’ anticipatory capacities could play to achieve a shared vision for the future.

17. There is no consensus on how to prioritise actions for economic transformation. Some countries prioritise by enabling bottom-up processes of regional discovery of areas of potential advantages; others select key industries of relevance for the country based on current and potential advantages; and others prioritise by investing in scientific and technological development. One of the key pillars of the PTPR is the “anticipation capacity” of transformation strategies and ecosystems, i.e. the capacity to detect future opportunities, factor-in voices for change, and anticipate potential shifts in

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global and domestic dynamics. Governments are not known for being at the forefront of mechanisms and for scenario building, nor for using scenarios and foresights in strategic planning. However, the complexity and uncertainty of the current global economic landscape, characterised by high speed changes, by major global political shifts, and by technological and digital revolutions, are increasingly calling for more sophisticated and forward-looking strategies. There is no unique way to increase the anticipatory capacity of governments, but much can be learned by looking at the different instruments some countries are putting in place to increase their forward-looking perspective and to enable effective prioritisation and coordination of actions for economic transformation.

18. Effective prioritisation needs to be based on scanning for potential futures. And it needs to ensure the commitment of all actors (private sector, academia and local communities) from its inception. This means having mechanisms in place to engage all actors in the definition of priorities, not only in the implementation of specific programmes and tools. In the case of Emilia Romagna, the competitiveness strategy follows a three-track approach: First, it prioritises value chains with consolidated local industrial and technological systems. Second, it identifies two additional areas in which the region could excel in the future based on shared perceptions of all the actors in the regional production and innovation system: cultural and creative industries, and life sciences. And third, it directs investments to enabling areas that have cross-industrial implications, and in particular, services and technology transfers for firms, with a specific emphasis on SMEs.

19. Strategic foresight is a structured, systematic approach to think about the future. It is not forecasting; it is about exploring and preparing for a range of plausible alternative futures. Most of the work in public policy is spent on the expected possible outcome of existing events; the role of strategic foresight is to provide decision-makers with an analysis of potential future scenarios to enrich the strategy setting process and define better policies for today and for tomorrow. Why strategic foresight now? The pace of change at the global level is so rapid and uncertain that it is impossible to do responsible policy making without preparing for a range of alternative possible futures.

20. There is no single best way to carry out strategic foresight. From the experience of countries that have most invested in developing these capabilities, including Canada, Finland, Sweden and Singapore, it is possible to identify six key features that any effective strategic foresight exercise requires:

1) Political demand. High level political demand is a precondition, because engaging policy making in foresight requires a cultural change in the approach to policy making. In Finland, for example, it is the Parliament that requests the elaboration of future scenarios. In the US, potential scenarios are elaborated and given to the new President at the beginning of each mandate.

2) A dedicated centre of expertise. There is no unique ideal institutional arrangement, and each country needs to identify the solution that best fits its institutional governance and culture. But a common principle is to identify and empower a dedicated centre of expertise in charge of it.

3) Coordination of foresight exercises across the whole government. From the experience of countries that have advanced the most in the elaboration and use of scenarios for public policies, the most interesting potential changes (and solutions) usually come from interactions of actors across different institutions, not only within institutions.

4) Targeted training both for experts in charge, and as part of the overall training of public officials.

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5) Multi-stakeholder dialogue. Strategic foresight cannot be done closed-door and in isolation. There is a need to bring unusual stakeholders and disruptive voices on board. Strategic foresight can also be a powerful to reach alignment and shared visions across different groups as, often, views that are ideologically polarized tend to smooth-out when thinking about medium- and long-term perspectives.

6) Integration of strategic foresight into national strategy setting. There should be a mechanism to ensure that the results of the strategic foresight processes are embedded into the national strategy and that they trickle down to each policy area.

21. Scanning for possible futures and defining scenarios is not an easy task. On the one hand, civil society can be resistant to this exercise. Engaging in strategic foresight implies the recognition that future outcomes are uncertain. This conflict with the generalised expectations of society that the policy makers in charge know what the future will look like, and that they are well prepared for it. On the other hand, the exercise is useful when it can go beyond the predicable, when weak signals are detected and transformed into potential game changers. Achieving these types of results is not often easy as most people tend to be conservative when identifying potential futures. In Canada for example, the first results were not much different from the expected future. Therefore, the government changed its method of work and challenged the strategic foresight group into looking at options that could be more disruptive. Some of these changes may look plausible, or they may not. But the point here is that there is a benefit to thinking about what foresight means to policy, and to be better prepared for whatever radical alternative does happen.

22. In some cases, the anticipation of disruptive changes comes from the private sector. In these cases, the government needs to be able to react quickly and become a key enabler of transformation. For example, in Sweden, the state-owned steel manufacturing company has decided to shift towards carbon-neutral high performance steel. The company wanted to get a head-start in the future of the auto-industry in which one of the future plausible scenarios is dominated by electro- mobility and sustainability. Today, steel production uses old furnace technology that has high energy consumption. The company scanned for a number of alternatives, including the use of hydrogen gas. Shifting towards hydrogen gas would influence the whole supply chain and require the buy-in of all stakeholders, including science and technology institutes, as well as universities and the overall supply chain network. In the Swedish case, the transformation could happen because the science, technology and innovation system works together on problem solving. The national energy company recognized the production of hydrogen gas as feasible, and the private sector shared the costs with universities and research centres that were challenged by businesses to address this issue and provide alternative solutions. In this context of a dense and well-functioning innovation system that involves trust and incentives to work towards common goals, combined with a generalised pro-innovation mind-set, the small vision of one agent (shifting towards carbon neutral steel production) was transformed into a massive opportunity for diversification in multiple industries.

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Key takeaways for Chile

As the country makes progress in its pursuit to foster dynamic change in its economy and society, building internal institutional capabilities to identify potential futures is needed.

These capabilities could play multiple roles, and help to:

 Build consensus on Chile’s future options and needs. Strategic foresight can be a powerful tool to align visions for the future, to generate consensus, and create the required buy-in from all actors, necessary for its economic transformation to become a reality.

 Identify key needs to compete in the future. Chile faces a challenge with human capital and the training of people in a way that matches the demand of a very dynamic international market. Scanning for possible futures might help identify specific skills gaps in unusual areas. For example, scenarios on the global functional and healthy food industry reveal that in addition to sophisticated agro-, chemical, and digital skills, modelling and predicting skills to better understand consumer behavior are needed to compete globally.

Table 1 summarizes consensual and controversial issues in the diversification debate, with a view to identifying what role increased governments’ anticipatory capacities could play to achieve a shared vision for the future.

Table 1. Diversifying the Chilean economy: opportunities and challenges

Consensual issues Controversial points Need to reduce copper dependency (mostly urged by the steep reduction in copper prices of the last 5 years). The history of sound-macroeconomic management, good governance and trade openness could be an asset for managing the more complex policies Identification of priorities through: needed for diversification in an industry 4.0 & GVCs  Sectors/economic activities approach global landscape  Challenge-driven approach Need to identify mechanisms to better learn from FDI,  Market signals & economic openness and increase knowledge & technology spillovers from foreign talents and firms Banks are perceived as conservative and with limited interest in backing up innovative ventures and projects Opportunities & challenges of the current approach to prioritisation + Existing initiatives (mostly led by CORFO) to create - Political polarisation might have a negative impact opportunities for change (creation of new companies, on planning and execution incentives for changing the behaviour of firms and technology centres & universities) + Creation of a Productivity Commission favouring - Lack of a shared vision for the future => little public-private dialogue for identifying priorities for commitment to high-impact-long-term projects, little actions patience in allowing diversification projects to deliver results, and difficulty in scaling up successful experimentations (e.g. cluster policies) +/- Existence of spaces for forward-looking thinking - Excessive reliance on documents & plans instead (e.g. Future Commission in the Senate and National of creating the foundations for the plan to be Council for Innovation and Development) but no implemented (e.g. having a sound STI and trade mechanisms to translate future perspectives into a infrastructure, an ecosystem of companies and shared vision for action technology centres, and a mind-set that values innovation and change)

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4. Advancing in decentralisation requires resource transfers, capacity building, and performance-based contracts

23. Chile is the most territorially unequal country in the OECD. Indicators of population, GDP growth and productivity are concentrated in the capital city. This is not unique to Chile as some OECD countries, such as France and UK, show the same pattern. However, Chile’s situation is more extreme, as regions are not catching up in terms of productivity growth. Even mining regions, such as Antofagasta, are reaching a limit to labour-productivity growth, and the future scenarios of mining are not brighter for these regions.

24. Chile is a highly centralised country, with a recent history of gradual decentralisation. Regions account for 13% of general government expenditures (versus an OECD average of 40%) and 27% of government staff expenditure (versus an OECD average of 60%). On average, convergence in income per capita is correlated with growing decentralisation; however there are notable exceptions, such as New Zealand which, despite its high income per capita, maintains a high level of centralization in public policies.

25. Since 2014, Chile has given a renewed impetus to the decentralisation agenda. As part of the implementation of the Innovation and Production Agenda, the country has implemented targeted reforms to increase the capacity of regions to define priorities and administer budget for economic transformation and innovation. These reforms include the direct democratic election of regional governors; however the reform on the effective power of these regionally elected governors is still pending approval. CORFO, the implementing agency in charge of economic transformation, is proposing to decentralise 40% of its budget and it is now piloting this decentralisation process in the regions of Antofagasta, Bio-Bio and Los Rios, and plans to expand the experiment to three additional regions in 2018 and to all regions by 2021.

26. To increase the voice of regions in strategy setting, highly centralised countries need to change their way of functioning, and to shift from execution to exploration. Effective transformation strategies require governance mechanisms that take into account territorial perspectives. This goes beyond territorial planning and needs to look at the territory and the local communities as repositories of knowledge, know-how and capabilities that contribute to define the uniqueness and the competitive advantage of nations. The government needs to learn how to work with its territories, its constituencies and its population to reveal their priorities and identify a shared vision for the future. This means creating effective spaces for dialogue with the regional stakeholders and accepting that these processes don't happen overnight, that they require time and continuous effort. Regional development policy is shifting to a new paradigm: initially it was focused on the equalization of regions, then in the 1990s/2000s, the emphasis was on the competitiveness of regions, and currently, the debate in the OECD is shifting towards more comprehensive approach that takes into account the overall wellbeing of citizens. This requires recognising and taking into account the specific needs of low-density regional ecosystems.

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Enabling territories to be agents of change

Defining processes to get the local communities to participate in transformation strategies

Local Increasing capabilities at the regional communities and local levels

Enabling funding for regional development strategies Goverments (national,

Businesses countries? regional, Fostering cooperation and avoiding local) between regions

Setting up mechanisms to enable a national vision developed with and for the regions other from Whatlearned can be lessons

27. The experience of other countries reveals good practices in terms of economic transformation and regional development, including:

 Production transformation strategies need to take territorial perspectives into account as a starting point regardless of the level of centralisation of the country. Slovenia is a fairly centralised country, yet it has developed a system to involve and work with regional stakeholders to foster competitiveness and industrial development. A key dimension is creating the right environment for business development. In Slovenia for example, regions are central actors in the promotion of interactions and cooperation between firms and the technological system, including incubators, accelerators, technology transfer offices, and creative economy centres.

 “Don’t think about innovation only: you will need to provide everything at the same time”. Competitive territories offer dense and trust-rich environments in which education, standards and norms, infrastructure, financing and services are available. In the 2000s, there had been too much emphasis on solely promoting innovation and/or human capital, while successful experiences show the need for a more comprehensive approach. In particular, it is important to create spaces for aligning norms, infrastructure and services to the priorities of the strategy. This is a systematic effort that requires trust and social capital across the whole production and innovation system. For example, the experience of smart specialisation in Emilia Romagna (an already substantially developed and industrialised region of Italy), and its incentives for R&D, support to entrepreneurship, FDI attraction efforts, training, and export promotion are all coordinated under a vision of the region and for the region. The policy mix is included in a seven-year framework and endowed with an initial public investment of 700 million UDS, complemented by private funds for investments up to at least 50% of the initial public investment.

 Refining the definition of “regions”. On the one hand, it is important to identify economic and functional regions beyond administrative borders to avoid the duplication of efforts and increase impact. Often, a production and innovation ecosystem spans beyond administrative boundaries and transformation strategies need to take economic, societal and geographical realities into account. This is particularly relevant for tradable activities for which the value chain often goes beyond one region. Another issue is to refine the definition of rural areas. The OECD is already working on exploring ways to better define rural areas through criteria,

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such as remoteness and/or proximity to or distance from given economic and functional regions.

 Implementing effective mechanisms for resource transfers. Setting up mechanisms for resource transfers and checks and balances through contract plans between the national government and the regions are needed to avoid the duplication of efforts and waste of resources.

28. The EU smart specialization strategy is one of the most relevant and recent experimentation efforts in enabling diversification and industrial development. The strategy rests on the principle that territories are repositories of knowledge and know-how. It has mobilized 65 billion euros to enable the definition and implementation of regional specialization strategies in EU regions, fostering dialogue and knowledge-sharing between actors of local production and innovation systems. The strategy enables actions from a bottom-up perspective at the regional, national and EU levels, with a view to identifying needs and opportunities, and to then provide support in the form of financing, services and infrastructure at the most appropriate level.

29. While it is too soon for a comprehensive impact assessment of the EU Smart Specialization strategy, four key success factors can be identified:

 Triggering the interest of regions to participate. The interest of regions in these policy changes cannot be taken for granted. Some systems might simply want to preserve their current position or resist change. In addition, not all regions will be proactive in the same way, so investing in explaining the strategy and clarifying the benefits that could accrue from it is needed.

 Shifting the focus from document elaboration to action. A key element of the EU approach is to enable a contrastive dialogue between businesses, the government, academia and civil society. The regions that have effectively managed to implement this approach did so not in a bureaucratic way, but they focused on identifying actions that could trigger change in the region. The elaboration of the regional strategy document was considered a mean, not an end.

 Taking history into account. Within and between countries, regions highly differ in terms of their institutional setting, history and culture. The EU strategy needs to valorize and recognize these differences to be effective. Some regions focused on strengthening their historical richness, while others used the smart specialization to reinvent themselves in light of potential future opportunities.

 Achieving strong political commitment. A capable and determined public administration is needed to translate interactions between businesses, academia and civil society into actionable strategies and policy tools.

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Key takeaways for Chile

Chile needs to advance in its decentralisation process, finding the approach that best suits its historical and overall institutional arrangement.

Setting up mechanisms for resource transfers and defining contract plans between the central government and the regions are essential components of the effective implementation of its decentralization strategy.

The country will benefit from exploring meso-regional approaches in strategy setting and implementation, as well as from taking into account the specific needs of remote and low populated areas.

International cross-regional cooperation will also be important to certain production ecosystems, especially in the north and in the south of the country.

Table 2 summarises the preliminary assessment of priorities and challenges in the current approach to economic transformation.

Table 2. Increasing the “place-based” approach in the Chilean transformation strategy

Priorities To advance in the decentralisation of industrial and territorial policies by enabling effective regional autonomy and intensifying the dialogue with local actors. To create mechanisms for identifying local priorities based on territorial assets and visions and to create spaces for allowing these priorities to be part of the process of priority setting at the national level. To identify mechanisms to implement actions that go beyond each region’ strengths and that exploit the synergies and complementarities between regions. To shift from experimentation to effective and well-funded regional strategies, with clear strategic objectives and good governance and support. Current challenges Little involvement of the local community in national territorial planning and economic diversification strategies The centralised tax collection system hinders the fiscal capacity of municipalities and limits possibilities to create more diversified local economies. A mechanism to support lagging/less developed regions is currently missing. If political and economic powers continue to be concentrated in the capital city, it might translate into diseconomies of scale and mega-urbanisation challenges in , and in growing social tensions and underutilisation of the growth potential in other areas of the country. Scant capabilities at the regional and local level hinder the capacity of the state to act as an effective planner and implementer.

5. Managing sector specific programmes: start small, experiment, and identify quick wins

30. Chile has a record of experiences in managing competitiveness programmes for specific industries (forestry, salmon, and more recently the global successes of the industry are well- known cases). Some lessons learned from these experiences include early partnerships with some key actors in the private sector and broad range government support – from financing to infrastructure and norms. In the case of the wine industry, Chile also implemented a well-managed policy for export promotion matched with effective management of country image. Since the mid-2000s, in line with the renewed country willingness to shift gears in diversifying the economy and in embracing more innovation-driven growth, the country has started to experiment with different approaches to enable the development of new/specific industries. The country adopted a “cluster” approach in 2008, with a view to promote ecosystems in key economic areas (including mining, global services and agro-food). In 2011, the cluster programmes were reformulated, eliminating the specific industry focus.

31. Nowadays, the country has designed and is starting to implement an ambitious transformation strategy (Transforma) through CORFO, which builds on past experiences, and

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moves forward by focusing on enabling a shared long-term vision for the future. Transforma has three main objectives:

i) promoting the diversification and sophistication of the Chilean ecosystem;

ii) developing world-leading suppliers of higher value-added products and services; and

iii) enabling a shared vision for the future in key industries through the coordination of public and private stakeholders.

32. Transforma has eight priority industries: mining, agro-food, construction, health services, tourism, creative industry, fishing and , and global services, and five horizontal areas which are seen as enablers of future competitiveness for all industries: logistics, solar energy, water supply, smart industries and advanced manufacturing (Figure 1). For each of the 8 industries, a public- private group develops a long-term road-map for action with priorities and associated policy tools. The combination of six enabling areas (physical and technological infrastructure, R&D and innovation, human capital, standards and norms, sustainability, and the development of supply chains) with sector- specific priorities defines a matrix for public and private actions the aim at removing constrains and unleashing the potential of each industry

33. Different industries face specific opportunities and challenges. Less consensus exists, however, on:

i) which governance, transparency, and accountability mechanisms are better placed to enable policies to take into account and respond to these industry-specific challenges and

ii) how to design and manage a policy mix that maximises the synergies between different sectoral needs, and that also tends to the specific needs of each industry.

34. The current Transforma strategy seems to have found a balance for this based on a two-level approach: on the one hand, it identifies key enabling areas and associated actions for all sectors (e.g. logistics, standards, use of the Internet of Things, etc.), and on the other hand, it creates an opportunity for discussions on visions for the future of each key sector through public-private dialogues. Table 3 includes a preliminary assessment of the Transforma strategy.

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Figure 1. Transforma Chile: priority areas

Transforma Chile

Health Creative Fishing & Global Mining Agro-Food Construction Tourism Services Industry Aquaculture Services

Logistics

Solar Energy

Water Supply

Smart Industries

Advanced Manufacturing

Table 3.

35. Solar energy is one of the most challenging areas for Chile. The country has a strong comparative advantage, but the existing dominant technology from China is not optimal for Chile, as the country has very specific and high UV solar radiation. Chile points to developing targeted solutions through the establishment of an R&D consortia and by selectively promoting FDI, including conditionalities for investors to enter and co-finance the R&D consortia. Two major challenges that the country has identified so far in the solar energy program are the need to develop human capital with the right skills, and the creation of a network of local suppliers.

36. Sectoral and/or industry-focused programmes are difficult to manage. The public sector lacks specific knowledge on scientific, technological and market opportunities, and incumbent actors often pursue their individual strategy and don't necessarily include the public good dimension in their utility function. In general, effective sectoral or industry focused programmes need to:

1) Define needs with a long-term vision

2) Identify the policy mix for action

3) Mobilise investment

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DEFINING NEEDS WITH A LONG-TERM Multi-stakeholder dialogue VISION

Skills R&D and

Innovation

IDENTIFYING THE POLICY MIX FOR Norms & Infrastructure ACTION Standards & Logistics

MOBILIZING Public and private financing INVESTMENT

37. Some of the lessons learned from other countries’ experiences are:

1) Start small, experiment, and identify quick wins. Legitimising state intervention in specific industries needs particular attention, as the risks of capture and are high. Industry-specific programmes need to be technically feasible, yet they also need to be politically acceptable. Transparency mechanisms and bargaining capacities with multiple stakeholders are needed. In Colombia, for example, the Production Development Policy (PDP) started with the piloting of some actions to gain credibility and increase trust.

2) Go beyond pure economic assessments, and analyse the impact on jobs and the environment. This will require developing new sets of indicators to assess transformation strategies according to a more comprehensive framework.

3) Understand the needs of the buyer as the first step in developing a local supply chain. The Japanese International Cooperation Agency (JICA) supports private sector development loans, technical assistance and services for firms. JICA scans the local economy, identifies potential suppliers, and sees how to link them up with buyers. JICA provides supports for skills development, product development, and overall enhancement of the capacities of local firms, and links these activities with the needs of buyers located in given special economic zones.

4) Ensure local ownership. Even when some targeted or sectoral programmes are initiated through international partnerships, ownership of the local communities should be built and maintained. In Colombia, the National Production Development Policy (PDP) starts with the identification of industrial development opportunities in specific industries linked to regional strengths.

5) Avoid capture by incumbents and think of the potential to stimulate the creation of medium-sized firms upfront. Sectoral programmes require spaces for dialogue with multiple stakeholders, and mechanisms to avoid that the public interest simply aligns with the strategic orientations of large and dominant firms should be put in place. Strategic investors and big players are important, but it is also paramount to create incentives to avoid

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that the sectoral programmes respond to the agenda of monopolistic powers to the detriment of the development opportunities of the rest of the firms, especially in a wealthy medium- sized firms sector.

6) Set up incentives to manage the extra-rents that big winners will earn. Effective transformation programs will result in new market structures, products and services. When significant public resources are invested, it is important to set up mechanisms that ensure the productive re-investment of the extra rents that certain economic agents will earn thanks to the creation of new markets opportunities.

7) Monitor implementation on a continuous basis and establish feedback mechanism between strategy planning and monitoring to ensure fine tuning of policy design.

Box 1. Fostering private sector development: lessons from JICA

JICA is active in fostering private sector development. The paragraphs below summarize some key lessons learned from project implementation in different countries.

Promoting multi-stakeholder dialogue in Ethiopia. Ethiopia’s vision is to be the leading nation in Africa in light manufacturing. To achieve this, the whole industrial and technological system needs to be transformed. For this, JICA invested in the creation of a multi-stakeholder policy dialogue favoring the alignment of visions across multiple stakeholders. These dialogues should have high political leadership to ensure impact.

Strengthening the quality and image of leather from and made by Ethiopia. Japanese buyers had a preconceived, negative image of the quality of Ethiopian leather. The uniqueness and the qualities of the Ethiopian leather were not recognized by consumers and the price premium that they were ready to pay was very low. In addition, designs were not aligned to the preferences of potential Japanese buyers. JICA set up a program to brand the Ethiopia highland leather. It developed high quality products to show the quality of domestic production and promoted international awareness through participation in Japanese trade fairs. JICA also worked with Japanese designers to develop new design patterns for the local leather that match buyers’ demand.

Strengthening the automotive supply chain in Thailand. The government wanted to enhance local domestic capabilities. JICA mobilized the private sector and foreign investors to train and share good practices to enhance the capabilities of local suppliers.

Building a tier 2 automotive supply chain in Mexico. Japan has a long history of cooperation to strengthen the competitiveness of local suppliers in Mexico. JICA collaborated with tier 1 providers to scan and identify potential tier 2 suppliers, Japanese experts were then assigned to the potential tier 2 suppliers to increase their local capacities. As a result of the program, the sales between tier 1 and tier 2 providers increased.

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Key takeaways for Chile

 Start small and experiment

 Closely monitor and evaluate impact

 Avoid being captured by incumbents

Table 4. Preliminary assessment of the “Transforma Chile” strategy

Chile Transforma √ Road-maps with long-term horizons (e.g. 20205 for agro-food, 2035 for Anticipation capacity smart and green mining) developed through PPP ? What mechanisms are in place to ensure the adaptability of the strategy in Adaptation capacity light of changing priorities/implementation results/and or any other exogenous factor? √ Financing mechanisms and incentives for innovation Learning and upgrading Conditionalities fostering cooperation for technological development potential Identification of skills’ needs and plans for bridging the skills gap ? How many resources from the government and businesses are available? √ Multi-stakeholder committees for identifying shared priorities Interconnectedness Conditionalities for cooperation between technology centres, universities, propensity firms How to ensure environmental and social sustainability of transformation Embeddedness potential ? programmes? What is the role of regions & territories in the Transforma strategy? Current challenges How to ensure long-term commitment from private sector with an annual budget allocation process?

Is the budget aligned with the strategy’s transformative needs? Chile has an initial budget of 175 USD Millions for three years, while, for example the Emilia Romagna region (Italy) has a 700 USD Million budget for the period 2014-2020 in the context of the EU Smart Specialisation Strategy.

How to ensure synergy across multiple actions and programmes that will be implemented in each sectoral program?

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6. Next steps in the PTPR of Chile

38. The PTPR of Chile will be launched in Chile in January 2018. The following Table Summarises the next steps in the PTPR process.

2017

19 - 23 June 3rd Mission to Chile

End of July OECD submits the first draft to Chile for revision OECD requests to the peers and members of the PTPR PLG inputs/information

August Chile sends the comments to OECD

September OECD finalizes the draft and revises the text 4th Mission to Chile

October 4th Final draft ready OECD shares final draft for comments

5-11 October Chile, PTPR PLG and other parties revise the final draft

October 15th OECD sends the manuscript to publication

October-December Publication process

15-16 November Discussion of the PTPR of Chile in the 9th Plenary Meeting 9th Plenary Meeting, Bangkok, Thailand

2018

15-29 January PTPR Launch in Chile Report published and available online

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