Industrial Policy and Learning Lessons from Latin America
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OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 10 Industrial Policy and Learning Lessons from Latin America Wilson Peres and Annalisa Primi 10.1 Introduction In the last two decades, the world global economic outlook has profoundly changed. The rise of China, the shifts in the global geopolitical equilibria and the digital revolution are configuring a fast-changing economic landscape in which windows of opportunities open and close at high speed. The South East Asia and the Pacific region dominates the headlines due to its growing global relevance. Africa gathers world attention as the continent where most of global population growth is expected to happen and where local leaderships are standing up with a new, shared vision for the future embedded in the Africa Union Commission (AUC) Agenda 2063: the “Africa We Want”, and as a continent for business and investment from traditional and emerging partners. In this context, Latin America appears as a region in slow motion. Despite progress made in poverty reduction, somewhat better income distri- bution, increasing access to education and health, advances in digital connectivity, and an emerging regional start-up scene, still the countries in the region remain among the most unequal in the world, and the region seems trapped in some of the challenges of the past (Prebisch, 1949). How to go beyond being a provider of raw materials and commodities to the global economy? How to benefit more from trade and FDI and ensure that the outcomes of increased participation in the world economy accrue to the domestic stakeholders? This chapter contributes to the understanding of how nations learn by looking at the experience of Latin America. The region is far from being homogeneous. It groups countries at different levels of development, with diverse market sizes and diverse specialization patterns. However, there are similarities in terms of histor- ical and cultural heritages, evolution of policy approaches, and economic per- formance that make the region a relevant and interesting unit of analysis. The region, as the chapter shows, could have achieved more in terms of development and economic transformation since the 1960s had it exploited at full all the levers through which economies learn and accumulate capabilities (Oqubay and Ohno, this volume). The experience of Latin American countries, despite the limited Wilson Peres and Annalisa Primi, Industrial Policy and Learning: Lessons from Latin America. In: How Nations Learn: Technological Learning, Industrial Policy, and Catch-up. Edited by Arkebe Oqubay and Kenichi Ohno, Oxford University Press (2019). © Oxford University Press. DOI: 10.1093/oso/9780198841760.003.0010 OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 208 aggregate outcomes, is rich and offers interesting insights on how and why nations learn, why some learn faster and better than others, and why some don’t manage to trigger the profound learning and accumulation mechanisms that are needed for countries to develop. The chapter, which reviews the experiences of several countries in Latin America, focusing on the most advanced and industrially developed, contains three sections. The first presents some stylized facts about growth and structural change in Latin America. It highlights the limitations of the growth patterns of the countries in the region, the shortcomings in terms of learning opportunities that derive from the prevailing production and trade specialization, and their limited knowledge base. The second section analyses the limited impact of industrial policies in Latin America, discussing their evolution over time and their capacity (or lack of capacity) to foster virtuous learning dynamics. The third section focuses on three areas in which the countries of the region have achieved change and have managed to foster learning in the economy and in policymaking. The chapter concludes deriving lessons for development. The chapter closes by recall- ing that there is no one-size-fits-all for how nations learn, but that, at the same time, there are some general principles that, when addressed, can trigger virtuous development patterns across all countries and regions. 10.2 A Region in Slow Motion in a Fast-Changing World Economy While the global economic outlook is changing at a fast speed, Latin America seems to stand out for its slow motion. Latin America’s contribution to world GDP is stable at around 7.5 per cent since the 1960s (Figure 10.1). The rise of South East Asia and the Pacific, and in particular China’s accelerated growth since the Open Door Policy of the late 1970s, represent a major landmark in the evolution of the global economy outlook. The South East Asia and the Pacific region accounts today for 28 per cent of world GDP, up from 12 per cent in the 1960, surpassing the United States as the world leading economy since 2007. Latin America stands out for its reduced dynamism. Differently from Africa, China, and South East Asia, over the long run the region is growing less than the world average (Figure 10.2). Despite the increasing demand for its raw materials and the growing middle classes that could have sustained GDP growth through domestic demand, the region is far from recovering the growth rates of its Golden Age. The regional average GDP growth in the last decade is half of what it was during the decades of the 1950s and 1960s, which coincided with the phase of the OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 209 35.00 30.00 25.00 20.00 15.00 10.00 % over world GDP 5.00 0.00 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Latin America and the Caribbean China United States East Asia and the Pacific Figure 10.1 Share of domestic GDP in world GDP (US$ constant, 2010), 1960–2017 Source: Authors’ analysis based on World Bank Development Indicators 12.00 10.00 8.00 6.00 4.00 2.00 Average annual GDP growth (%) 0.00 1960 1970 1980 1990 2000 2010–2017 East Asia and the Pacific (without China) Latin America and the Caribbean United StatesSouth Asia China Africa World Average Figure 10.2 Average annual GDP growth (US$ constant, 2010), 1960–2017 Source: Authors’ analysis based on OECD (2018f) Main Science and Technology Indicators (https:// stats.oecd.org/), UNESCO (2017), Institute for Statistics Database (http://data.uis.unesco.org/) developmental state and with import substitution policies oriented to build domestic industrial capabilities to compete in the global market. Learning enables countries to progress; learning is in fact the origin of increases in GDP and productivity (Greenwald and Stiglitz, 2013). Learning takes place at different levels. On the one hand, it happens at the level of policymaking and institutions (see Section 10.2); on the other hand, it happens in production and OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 210 innovation systems at different levels: sectors and value chains, firms, territorial clusters, and individuals. The limited growth performance of Latin America compared with Asia is associated with the marginal, unidimensional integration into the global economy, the persistent structural inertia of the region, and with the associated limited learning opportunities. On the one hand, Latin America remains anchored to raw materials and commodities and with a limited partici- pation to global value chains (GVCs). While in the success stories from Asia the Hidalgo-Hausmann economic complexity index has risen in the last two decades, it has remained very low in South America, Central America, and the Caribbean (ECLAC-Economic Commission for Latin America and the Caribbean, 2016: 114). Not only have the countries in the region specialized in natural-resource- intensive activities or in assembly functions in GVCs, but many countries in the region have seen their dependency on natural resources increase over time at the expense of their industrial capabilities. In Chile, for example, the share of mining exports over total exports increased from 40 per cent to 50 per cent from 1990 to 2017, and, during the same period, in Colombia the share of oil exports over total exports doubled from 25 per cent to 50 per cent (OECD/UN- Organisation for Economic Cooperation and Development/United Nations, 2018 and OECD/UN/ UNIDO 2019). In Latin America achieving structural change and diversifying economies is still a challenge. Manufacturing, which despite its changing nature due to digitalization is still crucial in terms of its capacity to generate linkages and foster learning and accumulation of capabilities, is losing ground in the region due to growing competition from China and limited investment in research and innovation. Most of the economies of the region share the challenges of low productivity and little diversification of their economic structures. These char- acteristics are associated with a concentration of opportunities in a few firms, sectors, and territories. For example, in Chile large firms play a dominant role in the economy but they innovate less than their peers in advanced countries. Large firms in Chile are responsible for 73 per cent of business turnover and 57 per cent of total business R&D, while in Germany such firms account for 53 per cent of turnover and for 85 per cent of R&D (OECD/UN, 2018). In addition, economic opportunities tend to be concentrated in a few hubs within each country. In Chile, for example, the Santiago Metropolitan Region generates almost half of national GDP, and accounts for 40 per cent of domestic popu- lation. Foreign direct investment concentrates in Santiago and the mining regions of Antofagasta and Atacama, and the creation of new firm clusters in Santiago (OECD/UN, 2018). Something similar occurs in Mexico, where most of modern production and export platforms are located in the northern and central parts of the country.