TCI 2014 Rethinking Productive Development: Sound Policies and Institutions

Rethinking Productive Development:

Sound Policies and InstitutionsCarlo Pietrobelli

Mexico and Latin American Economies

11 November 2014

Rethinking Productive

Development: Sound

Policies and Institutions

Carlo Pietrobelli Lead Economist

Competitiveness and Innovation Division

Inter-American Development Bank

carlop@iadb.org

GDP per capita: Mexico slower than other

emerging countries. The gap with the US widens

-3-

0

5

10

15

20

25

30

35

40

45

0

5

10

15

20

25

30

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

PIB

pe

r c

áp

ita

(m

ile

s d

e d

óla

res

de

20

05

)E

sc

ala

log

arí

tmic

a

Ingreso per Cápita(1960-2009)

Brasil China

India Corea

México Estados Unidos (eje derecho)

country

GDPpc annualgrowth

1960-2009

China 6.53

S.Korea 5.59

India 3.03

Brasil 2.44

USA 2.19

México 1.92

Problem in LAC: 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

Po

rcen

taje

de

Pro

duct

ivid

ad T

ota

l d

e lo

s F

acto

res

de

Est

ado

sU

nid

os

País típico de América Latina

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

11/20/2014 4

73.4

52.049.4

66.7

49

54

59

64

69

74

79

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

Po

rcen

taje

de

Pro

duct

ivid

ad T

ota

l d

e lo

s F

acto

res

de

Est

ado

sU

nid

os

País típico de América Latina País típico tigres asíaticos

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

Very different in East Asia

11/20/2014 5

Many other countries invested much more in

Research and Development

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).

Countries like Korea 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 2008

electronics

garments

machinery

2008

7

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

8

electronics

garments

Edited by

DEVELOPMENT IN THE AMERICASIDB

RethinkingProductive DevelopmentSound Policies and Institutions for Economic Transformation

10

Innovation and New Dynamic Firms Clusters’ synergies

Take full advantage of Globalization

11

Schools and SkillsProtect the policy process from

capture and rent-seeking

Development Banks? Picking winners?

IM

Policies of the past…IM

H V

12

IM

Rice Protection in Costa Rica

IM

H V

Public policies captured by CONARROZ, dominated

by larger producers and rice processors

As local demand exceeds local production, import

tariffs at 35% protect non-competitive (local)

production; tariff-free import licenses are then granted

to local rice producers to process it. They import rice

at low international prices and sell it domestically at

higher prices.

The poor suffer: consumers pay high prices and

processors gain subsidies.

…and policies of the future

14

Rice Development in Argentina

(new varieties from Entre Ríos)

Low productivity rice variety was being exported from Entre

Ríos; with Brazil depreciation in 1999, rice exports lose

competitiveness.

At the same time INTA (in Concepción) was developing a new

higher quality and higher productivity rice variety

Local producers (through Pro-Arroz, their local foundation) tax

themselves to support INTA’s activities.

The Local Government helps by limiting free-riding (all gain

from a new variety but nobody is ready to pay for it!!) and

fostering coordination by imposing a new levy to finance INTA.

Results: new rice variety, increase in competitiveness, INTA

becomes world leader in rice technology.

Rice Productivity

50

75

100

125

150

175

200

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

Pro

duct

ion

Index

by

hec

tare

(1990=

100)

Sources: Own calculations based on FAO (2013).

Costa Rica

Argentina

Modern Industrial policies:

Can be done successfully…if done right

16

Need to rethink a modern approach to

industrial development and structural change

In LAC ambiguous approach to industrial policies: often

used in the 1970s and 1980s, then abandoned in favor of a

“Washington Consensus”.

Indiscriminate rejection of old policies was not a solution either:

the Washington Consensus was not enough for satisfactory

growth.

Yet other countries implemented industrial policies cleverly and

successfully.

How to tell apart the good policies from the bad ones.

A pragmatic approach to help promote economic transformation

and Competitiveness in a globalized world.

Three basic tests for policies

1. Market Failures: Why is it that the market

does not do by itself what appears desirable?

2. Policy Design: Is the policy intervention a

proper remedy for the market failure? “wrong”

interventions would not help.

3. Institutions: Does the country have the

required institutions to adopt the policy

effectively? (Government failure may be

worse)

What to do…

11/20/2014 19

…and not to do

Policy

Design:

Public

Inputs

Market

Interventions

Horizontal Vertical

A Typology of PDP Interventions

One-stop shop for

business

registration

R&D subsidies

Phytosanitary

controls

Tax exemptions

for tourismR&D subsidies

20

Industrial policies are complex and risky. They

require:

• Process of discovering right policies

• Collaboration with private sector

• Efforts to avoid capture and rent seeking

• Cooperation across government agencies

Institutions key for success, but vary greatly across

countries• Policies that work in one context do not necessarily work in

others

Rather than best practices, adopt policies that best

match capabilities and institutions

Not best practices but best matches

21

Local examples of clever and modern

industrial policies.

Mechanisms to:

“discover” what policies are needed

improve coordination (private-private,

private-public, public-public)

What do Cluster Development Policies

have to do with this?

In a cluster externalities and coordination

failures naturally emerge, but also opportunities

to remedy them.

The correction of information asymmetries, of

externalities, of coordination failures, are the

guiding principles for cluster development

policies.

Help to exploit the advantages of linkages.

Why Cluster Development Programs?

IDB Cluster Programs in LAC

Organization No. of clusters

US$ Characteristics

IDB 180 300 M. (180 M. from IDB)

18 Loans supporting competitiveness, to Governments (often at sub-national level). In each Investments in approx. 10 clusters

IDB 30 70 M. approx. Some cluster-specific loans (DR, Gua, Hon, Panama, Haiti, Ecua)

MIF 72+40 US$120 M. approx.

Since 2007, grants to the private sector. First clusters (72), then local economic development (LED) (40).

Total IDB Group 322 490 M. approx.

Since 2000, always with local co-financing

Lessons from Experience

In fact cluster development programs have represented tools to

coordinate microeconomic policies.

They have often been flexible enough to adapt to local

circumstances and needs.

Through their participatory approach they have often helped to

identify the missing public inputs, the public policies needed, to

prioritize policies, and create consensus. (“Discovery” of the

right policies).

Many programs created local conditions for a better coordination

and collaboration among firms and with public entities.

“Platforms” to facilitate coordination and joint actions.

“Capture” of subsidies and “rent-seeking” appear to have been

lower than one would fear. “Checks and balances” were built

thanks to multi-stakeholder participation.

26

Do they Work? IDB Ongoing Impact Evaluation Efforts

E.g. in Brazil: Positive direct and significant effects on:

o Employment: about 20% increase in 3-5 years;

o Probability to export: about +5% per year;

o Export levels: increase 50%-80% for each exporter, with

persisting and growing effects overtime.

Indirect effects on firms localized in the area of influence of

clusters, especially on the export probability and levels.

Analysis of linkages, networks, and their influence on firms and

clusters performance through Social Network Analysis

In Maffioli, Pietrobelli, Stucchi (Eds.), 2015, The Evaluation of Cluster Development Programs,

Washington DC: IDB, a summary in:

http://www.iadb.org/document.cfm?id=37925857&pubDetail=1&wt_docType=Technical

Notes&wt_docnum=37925857&wt_language=en&wt_department=IFD/CTI&lang=en

Check out our new App at the IDB!Updated data and main messages of 9 DIA editions

Or visit our website www.idb.org/DIAapp

and

27