Gabriel Porcile (ECLAC)
Figure 1. RER and Specialization
The literature suggests that production structures that are more complex (in the sense that they are more diversified and more knowledge-intensive) perform better in various dimensions—growth, international trade, real wages. In turn, the complexity of the production structure is related to the adoption of industrial and technological policy (see also our post Does production structure matter for income distribution?). Such policies are an important part of the catching up story, but other variables also play a role. An increase in the real exchange rate may allow the developing economy to compensate for lower relative productivity and hence encourage new exports.
Alicia Bárcena, (Executive Secretary of ECLAC)
In every forum where the future of Latin America and the Caribbean is analyzed, the same question in different forms is often heard: how can the region sustain and expand on the important economic and social achievements made in recent decades in a context of deceleration and high global volatility, such as the current one?
Although there appears to be no risk of a serious crisis such as the ones suffered in the eighties, the end of the nineties and the beginning of the 2000s, the current downturn seems to augur future scenarios of lower growth. This implies that the labor market will be less dynamic and could stop contributing to the reduction of poverty and inequality. Between 2012 and 2013, poverty dropped just 0.3% in Latin America, affecting 164 million people, while extreme poverty rose 0.2%.
Compounding the international situation, some endogenous problems restrict regional development, such as a disjointed and lagging production structure, high levels of informal work, insufficient investment rates with limited incorporation of technical progress, weak governance of natural resources, lacking public services, and major environmental and energy pressures.
The Economic Commission for Latin America and the Caribbean (ECLAC) believes the response to this crossroads must involve the building of national accords around different aspects of development, under one guiding ethical principle and ultimate goal: the equal rights of all people.
by Giovanni Dosi - Originally published in Sbilanciamo l’Europa Made in Italy special, May 9, 2014
For thirty years, up until the crisis of 2008, industrial and technological policies could not be mentioned: they were considered bad words for good people, including the so-called moderate and reformist left, and this was not limited to Italy. The mantra was - and continues to be - "the magic of the market," as described by the great economist Ronald Reagan; a "magic" fueled by "laissez-faire" and "why-should-politics-understand-more-than-companies?'' rhetoric.
It is time, instead, to explain the crucial role played by technology policy in the generation of most of the innovations we enjoy (and suffer through) today, from at least WWII onward; and furthermore, how technological and industrial policies have always played a crucial role in the industrialization process, most of all among countries considered latecomers (lest we forget that just a couple centuries ago the United States and Germany were considered latecomers when compared to England).
First and foremost, what is meant by industrial and technology policies? Broadly, they are the policies that generate and stimulate technological innovation, and also stimulate and encourage learning and productivity by private companies; they create and sustain productive activities in public areas as well as particular locations.
As demonstrated in Mariana Mazzucato’s book, Lo stato innovatore (Yale University Press), without technological innovation, specifically the innovations generated by major public research programs (such as the CERN physics), and military and space programs, we would not have innovations such as the Internet, microprocessors, the web, iPads and so on. Without the large public programs at the National Institute of Health in the U.S. we would not have the (few) new drugs that the large pharmaceutical companies provide us at very high prices. As the late Keith Pavitt quipped, U.S. leadership has been fueled by the paranoia of American Communism and cancer.
by Gabriel Porcile (ECLAC)
Moving towards a more complex production structure is not a process that occurs spontaneously. Industrial policy is required for catching up.
The classic example is Korea, where industrial policy has persistently focused on enhancing technological capabilities and on creating new sectors, sequentially targeting sectors with higher technological intensity. A similar story can be told about Finland, where post-war industrialization based on heavy public investments and corporate arrangements (between the government, unions and private firms) left room in the 1990s for an industrial policy based on the evolutionary concept of National Innovations Systems, which sought to create a favorable environment for R&D. Inversely, in most Latin American countries, industrial policy was abandoned in the 1980s; and only in the 2000s did it slowly come back (Peres, 2011). The rather slow return of industrial policy, combined with the commodity boom and the tendency of the real exchange rate to appreciate, have compromised diversification in Latin America.
As a result, divergent trends in structural change emerged in Latin America as opposed to Korea and Finland. A simple, albeit useful, indicator of the intensity of structural change is the evolution of the Index of Relative Participation (IRP), defined as the country’s share of the engineering industries in total manufacturing value added, as compared with the same share in the United States. Such an index gives an idea of whether a country succeeds in approaching the production structure of a benchmark country which is already on (or close to) the international technological frontier.