Rethinking Productive Development - World Bankpubdocs.worldbank.org/pubdocs/publicdoc/2015/7/280481437075537917/... · 1968. 1972. 1976. 1980. 1984. 1988. 1992. 1996. 2000. 2004.

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DEVELOPMENT IN THE AMERICAS IDB

Rethinking Productive Development Sound Policies and Institutions for Economic Transformation

Problem: Low and falling productivity

73.4

52.0 49

54

59

64

69

74

79

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Porc

enta

je d

e Pr

oduc

tivid

ad T

otal

de

los F

acto

res

de E

stad

os U

nido

s

País típico de América Latina

Source: Own calculations based on Fernández-Arias (2014).

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73.4

52.0 49.4

66.7

49

54

59

64

69

74

79

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Porc

enta

je d

e Pr

oduc

tivid

ad T

otal

de

los F

acto

res

de E

stad

os U

nido

s

País típico de América Latina País típico tigres asíaticos

Source: Own calculations based on Fernández-Arias (2014).

Problem: Low and falling productivity

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Countries like Korea Invested much more in R&D…

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

ParaguayEl Salvador

PerúBolivia

ColombiaPanamáEcuador

América LatinaUruguay

ChileMéxico

Costa RicaArgentina

BrasilItalia

EspañaReino Unido

FranciaOCDE

AlemaniaEstados Unidos

DinamarcaSuecia

Corea del SurFinlandia

Israel

Fuente: OCDE (2010) y RICYT (2013).

Source: Author’s calculations based on Hausmann et al (2011).

…and used industrial policies to produce deep economic transformation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1984 1988 1992 1996 2000 2004 20082008

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Source: Author’s calculations based on Hausmann et al (2011).

Latin America underwent little transformation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1984 1988 1992 1996 2000 2004 20082008

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Searching for the right PDPs

Latin America adopted widespread industrial policies in the 60s and 70s but, in contrast to the successful countries, many caused more harm than good.

Indiscriminate rejection was not a solution either: the Washington Consensus was not enough for satisfactory growth.

Countries are now aiming at going beyond the WC, searching for the right productive development policy solutions, but not always with clarity.

New fruitful approaches are emerging, alongside the industrial policies of the past.

IM

Policies of the past… IM

H V

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…and policies of the future

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Rice Productivity

50

75

100

125

150

175

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Prod

uctio

n In

dex

by h

ecta

re (1

990=

100)

Sources: Own calculations based on FAO (2013).

Costa Rica

Argentina

Productive development policies: Can be done succesfully…if done right

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It is now time to rethink productive development policy

It is clear that PDPs can be good or bad. The key is how countries can engage in effective PDPs that have played an important role in successful countries, while avoiding the problems of the past

In the book, we propose a conceptual framework to help policymakers tell apart the good policies from the bad

Framework starts with three basic tests

First basic test: Market Failure

Why is it that the market

does not do by itself what appears desirable?

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Second basic test: Policy Design

Is the policy intervention

a proper remedy for the market failure?

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What to do…

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…and not to do

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Third basic test: Institutions

Does the country have

the required institutions to adopt the policy effectively?

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How can we apply these basic tests to diverse policies?

To analyze merits and risks of PDPs, we classify them in different categories, along two dimensions:

Scope: horizontal (broad-based) or vertical (sector-specific)

Type of intervention: public inputs (e.g. phytosanitary control) or market interventions (subsidies)

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Public Inputs

Market Interventions

H V

A Typology of PDP Interventions

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Public Inputs

Market Interventions

H V

A Typology of PDP Interventions

One-stop shop for business registration

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Public Inputs

Market Interventions

H V

A Typology of PDP Interventions

One-stop shop for business registration

R&D subsidies

control

Tax exemptions for tourism

R&D subsidies

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Public Inputs

Market Interventions

H V

A Typology of PDP Interventions

One-stop shop for business registration

R&D subsidies

Phytosanitary control

R&D subsidies

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Public Inputs

Market Interventions

H V

A Typology of PDP Interventions

One-stop shop for business registration

R&D subsidies

Phytosanitary control

Tax exemptions for tourism

R&D subsidies

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Horizontal market intervention stimulate certain activities

BP

IM

BP

IM

H V

IP

IM

V H

R&D

Investment in machinery

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Identification of market failures BP

IM

BP

IM

H V

IP

IM

V H

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Identification of market failures BP

IM

BP

IM

H V

IP

IM

V H

=> Potential spillover

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Identification of market failures BP

IM

BP

IM

H V

IP

IM

V H

=> Potential spillover

7/16/2015 34

Identification of market failures BP

IM

BP

IM

H V

IP

IM

V H

=> Potential spillover

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Identification of market failures BP

IM

BP

IM

H V

IP

IM

V H

=> Potential spillover

⇒Where’s The Failure?

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The pioneer’s dilemma BP

IM

BP

IM

H V

IP

IM

V H

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The pioneer’s dilemma BP

IM

BP

IM

H V

IP

IM

V H

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Vertical public inputs BP

IM

BP

IM

H V

IP

IM

V H

BP

IM

BP

IM

H V

IP

IM

V H

Vertical public inputs

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Vertical Market Interventions •BP

•IM

•BP

•IM

•H

•V

IP

IM

V H

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Temporary financial support for hotels and airport can lead to a “good” equilibrium with investment

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The missing link in the value chain: sterilization of medical devices in Costa Rica

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Strategic bets are risky

How to structure the selection process? – Selection criteria tend to be ad-hoc, subjetive => Rent-seeking

Book discusses how countries (Ireland, Chile, Costa Rica) organized these processes, proposes objective criteria to identify sectors with latent competitiveness facing market failures

Strong institutions key to avoid capture by private interests, and phase out support when no longer required or bet fails

Mistakes bound to be made. But with solid institutions and a solid process, a few successes can pay for several failures.

Still, this quadrant should be handled with care!

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Industrial policies are complex and risky. They require: – Process of discovering right policies – Long time horizons so that policies can work – Collaboration with private sector, which opens the door to

capture and rent seeking – Close cooperation across government agencies

Institutional capabilities vary greatly across countries, so policies that work in one context may not work in others.

Different policies require different capabilities

Rather than best practices, contries should adopt policies that best match existing capabilities and institutions

Don’t bite off more than you can chew

Institutions are key for success

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