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First full draft March 4 2013, Productive Development Policies in Latin America Past and Present. Manuel R Agosin, Faculty of Economics and Business Universidad de Chile. This paper reviews industrial policy in Latin America from the Great Depression to our. days Its purpose is to derive some lessons for what Latin American and Caribbean. countries LAC should do in this area It has become clear over the last few years that. LAC if they are to accelerate their growth rates need more than a good macroeconomic. framework and the protection of property rights they need to be more proactive in. transforming their production structures still too dependent on primary commodity exports. or the assembly of final goods from imported components sectors that are ill suited to the. productive development jumps that have been associated with high growth in the. developing world over the past 60 years, The paper argues that industrial policy Mark I roughly since the 1940s up to the. debt crisis of the early 1980s which featured import restrictions the deployment of. development banks and other forms of state activism was more successful than the credit. it receives from the conventional view that has come to dominate academic and policy. circles Nonetheless it encountered diminishing returns as industrialization proceeded from. non durable consumer goods to more complex products it did not yield sustained growth in. countries with small domestic markets and it eventually bogged down into a maze of. indiscriminate measures with little economic sense The failure of integration efforts in the. region as a whole also accounts for the tendency of the inward oriented model as a growth. engine to stall, With the rise of the so called Washington Consensus in the early 1990s the view. became prevalent that governments should not be in the business of determining the sector. allocation of resources and that there was no particular value in the diversification of. production and little to gain by fostering such diversification from the state The main tasks. of governments were according to this view the maintenance of macroeconomic stability. and the protection of property rights, The ascendancy of the new orthodoxy led most governments in LAC to lower.
tariffs eliminate non tariff restrictions on trade privatize state enterprises and adopt a. welcoming but non interventionist approach to foreign direct investment FDI These. efforts were incomplete and some have argued that the failure of the liberalization drive to. raise significantly growth rates across the region was due precisely to the fact that reform. didn t go far enough especially in the liberalization of the labor market The lesson that. others draw however is that countries threw out the baby with the bathwater and that a. new approach to industrial policy industrial policy Mark II was required. Be that as it may efforts to transform the structure of production lived on in many. countries including those whose governments professed the greatest adherence to a non. interventionist development model In some countries these efforts were quite successful. With time countries began to adopt more pragmatic policies favoring those that. supported activities rather than sectors e g general training subsidies export promotion. innovation the constitution of business government councils to advise on public sector. actions to foster production in specific clusters and the provision of public goods. infrastructure regulation specific to individual sectors rather than interference with the. price system Nonetheless there have also been cases in recent years of upfront subsidies or. tax exemptions to attract FDI into favored sectors The use of export processing zones. EPZs to encourage investment both by multinationals and their national subcontractors. has proliferated mostly in Central America and the Caribbean. In most cases these policies do not yet constitute an organic whole and have not. been endowed with sufficient resources They do show however that efforts to transform. the production structure are still important in the mindset of policymakers Now is the time. to outline some of the elements of an industrial policy that is oriented towards moving. beyond dependence on the export of a few commodities for growth or of consumer goods. assembled from imported components, The paper is divided into six sections Section I discusses the main traits of state led. industrialization as practice between 1940 and the onslaught of the debt crisis in the early. 1980s Section II reviews briefly LAC s generally failed efforts at economic integration It. is argued that effective integration would have made more viable the industrialization. model albeit with quite different characteristics as there would have arisen substantially. greater specialization within the region in the manufacturing sector Section III recalls the. arguments made against the industrialization drive as its less rational aspects came to the. fore beginning in the 1970s Section IV discusses the advent of the new anti industrial. policy view associated with the Washington Consensus and its impact on policy in the. region Section V attempts a recap of where the discussion stands today while Section VI. looks forward, I Some history the era of state led inward oriented SLIO industrialization. Industrial policy has been present in the policies pursued by individual countries in the. region since the Great Depression It has also generated heated debates either embraced as. the single most important policy to reach development advocated with caveats or rejected. as the reason for the relative backwardness of the region. Conventional opinion among policymakers academics observers and in. international financial institutions in the last three decades has turned against industrial. policy on the grounds that picking winners is more likely to lead to wasted resources and. diminished welfare than to growth and development It should not be forgotten however. that during much of the period in which state led industrialization held sway such policies. garnered broad intellectual support and attracted financial resources from international. financial institutions and individual industrialized countries There is now some evidence of. a more positive assessment of industrial policy albeit one that is substantially different. from the state led approach of traditional policy and that this change is occurring even. within international financial institutions 1, Contrary to received wisdom LAC were never paragons of free trade even before. the Great Depression when growth was powered mostly by demand for raw materials from. the industrialized countries As has come to be documented in recent years LAC. maintained very high rates of nominal protection indeed among the highest in the world. from independence until the onset of the Great Depression see B rtola and Ocampo 2012. pp 131 134 and Coatsworth and Williamson 2004 By and large protection took the. form of specific tariffs As rates of inflation on imported goods in domestic currency. varied widely so did inversely the ad valorem equivalents of tariffs tariff revenues as a. share of import values While in some countries and in some periods of time high tariffs. did indeed have a protectionist intent as in Mexico towards the end of the 19th century by. and large the main objective was to raise public finance during times of internal and. external conflict and in economies where income or land taxes were technically or. politically difficult, As illustrations figures 1 through 3 show the long series of average ad valorem. tariff rates estimated by dividing tariff revenue by import values available for Chile since. 1817 and calculations with data for Mexico and Brazil Estimated average tariff rates were. quite high throughout the 19th century and in the 20th century prior to the Great Depression. After the onset of the Depression they rose to considerably higher levels This pattern was. quite typical of many LAC,Insert Figures 1 through 3.
The shock of the Great Depression was unprecedented In the region as a whole 19. largest countries between 1929 and 1932 the volume of exports shrunk by over 25. percent the purchasing power of exports by 40 percent and owing to the unavailability of. international financing import volumes contracted by over 60 percent B rtola and. Ocampo 2012 p 156 Eventually the shortage of manufactured goods and a variety of. measures to economize on imports and balance the external accounts in the face of. unprecedented declines in export values quantitative restrictions the abandonment of fixed. exchange rates and the ensuing nominal depreciations resulted in a strong process of. unintended and largely welcomed industrialization Some relief on imports also came. from the only immediate way out of the situation widespread debt moratoria. The advent of World War II extended farther into the horizon the scarcity of foreign. manufactures While export earnings recovered the disruptions to foreign trade and the. For an analysis of recent changes in approaches to development policy at the World Bank see Rodrik. 2006 and World Bank 2005 But as Rodrik himself notes the changes that can be evinced at the level of. policy research do not yet appear to have percolated down to the lending and technical cooperation levels. unavailability of imports resulted in large foreign exchange reserve accumulations And the. fillip that domestic manufacturing was given during the Depression continued. After the War and until the breakdown of the Bretton Woods regime in 1973 trade. policy was used more deliberately with protectionist intent While the economic strategy. that willy nilly emerged during this period had a number of elements that went beyond. import restrictions these did figure importantly in the policy package And those. restrictions encompassed not only high tariffs but also quantitative restrictions import. prohibitions import licensing and onerous interest free prior import deposits which had a. particularly protectionist bite in countries with high inflation rates. It has been argued even by some of its critics that import restrictions can. encourage productive diversification in a number of ways a it orients resources to new. activities albeit at current welfare costs b in sectors where there are likely to exist static. and dynamic economies of scale declining unit costs may eventually make them. internationally competitive2 c it reserves the domestic market for those willing to invest. in the economy and d the profits derived from those investments provide a source of. saving and financing for expansion in the same or in other sectors 3 In fact in several. countries particularly those with large domestic markets it was initially highly successful. As can be seen in table 1 beginning in the 1929 1945 period the rates of growth of. real value added in manufacturing in LAC were quite respectable Indeed during the 1945. 1973 period which coincided with the Golden Age of post World War II growth. manufacturing value added in LAC rose rapidly This was true of both the larger countries. Mexico and Brazil and also of many of the smaller ones During the period from the. breakdown of the Bretton Woods system up to the Mexican debt crisis of 1982. manufacturing growth continued to be strong but at a more subdued rate and not as. widespread as before Since then growth rates in the manufacturing sector have been very. insert Table 1, For the period 1945 1973 following B rtola and Ocampo 2012 we use the term. state led inward oriented SLIO rather than import substitution industrialization for. various reasons In the first place in most countries particularly the larger ones the role of. import substitution as such in growth was limited while domestic production to satisfy. growing domestic demand was quantitatively more important as a source of growth 4. Second imports did not decline as a share of GDP but changed their composition toward. manufacturing inputs and capital goods Third the policy tools used were wide ranging and. were not restricted to tariff and non tariff measures. Rodrik 1992 hammers home this argument on theoretical grounds with the use of a formal model. See Little Scitovsky and Scott LSS 1970 pp 118 128 for an early exposition of these arguments and its. caveats It should be noted that LSS and the country studies they summarize is the first work that fully. articulates a position against the high levels of protection that were widespread in developing countries in the. B rtola and Ocampo 2012 p 152 arrive at this conclusion using a Chenery decomposition of growth into. the expansion of domestic demand import substitution and export growth. Beginning in the 1940s almost all countries adopted deliberate policies of inward. oriented industrialization These policies were not restricted to the trade sphere but. encompassed the setting up of development banks the use of directed credits from public. and private banks and the entry of the state into the production of private goods and. services through public enterprises with the aim of diversifying the structure of production. and investing in infrastructure services that the private sector was viewed as not being able. to finance e g electricity telecommunications roads ports and importantly basic. A particular problem that the state set out to tackle was the need . Productive Development Policies in Latin America Past and Present Manuel R Agosin Faculty of Economics and Business Universidad de Chile Summary This paper reviews industrial policy in Latin America from the Great Depression to our days Its purpose is to derive some lessons for what Latin American and Caribbean

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