Industrial Policy in Latin America: Contemporary Development Strategies and Their Determinants
Cole Frank Integrative Exercise, Final Draft
March 24, 2015
Abstract: Over the last two decades, government support for business, in the form of industrial policy, has made a surprising resurgence across Latin America. This paper begins the task of constructing a framework for comparing national industrial policy schemes, and explaining variations across Latin America. The research has two main stages. The first stage is purely descriptive and entails categorizing several countries’ industrial policy schemes based on a number of pre-established criteria. In the second stage, an historical-institutionalist explanation for cross-national variations in these schemes is explored.
I. Introduction
In the wake of neoliberalism’s decline as the preeminent paradigm for economic
development in Latin America, scores of scholars have sought to explain the wide array
of distinct economic and political outcomes that have developed across the region. The 1
“post-neoliberal” order has proved difficult to decipher. Politically, the 21st century has
seen a surge of left-wing Latin American parties and candidates elected to power.
Nevertheless, this so-called “left-turn” has resulted in very little policy uniformity.
Relatively few countries have chosen to either fully embrace or abandon the emphasis
on market orthodoxy that characterized the 1980s and early 1990s. Instead, the majority
of Latin American countries have, to varying degrees, fused the pursuit for economic
liberalization with a quasi-developmentalist regime (Schrank and Kurtz 2005; Kurtz
and Brooks 2008; Macdonald and Ruckert 2009; Hochstetler and Montero 2013).
In this context, one of the few consistent trends over the past two decades has
been the resurgence of industrial policy in nearly every Latin American country’s policy
agenda (Peres 2006). These microeconomic policies, also known as productive
development policies, are broadly defined as any state intervention designed to promote
economic growth and make sectors, firms or productive activities more dynamic (Rodrik
2007). The policies take many forms, ranging from tax rebates for exporting firms and 2
1 The year 2009 alone saw the publication of books entitled Post-Neoliberalism in the Americas (Macdonald and Ruckert 2009), Governance after Neoliberalism in Latin America (Grugel and Riggirozzi 2009), and Beyond Neoliberalism in Latin America? (Burdick, Oxhorn, and Roberts 2009). More recent titles include Latin America after Neoliberalism (Wylde 2012) and After Neoliberalism? (Flores-Macias 2012). 2 While traditionally used to refer specifically to policies that targeted the industrial or manufacturing sector, today, industrial policy commonly refers to to policies in support of manufacturing, as well as agriculture, the services sector, energy, and infrastructure.
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loan guarantees for certain strategic sectors, to government-funded tech incubators and
job-training programs. What these policies all have in common is that they entail public
support for private industry. In contrast to government social spending (transfer
payments, health care, education, etc), industrial policy specifically targets the supply
side of the economy (Melo and Rodríguez-Clare 2006; Peres and Primi 2009).
The recent growth of, and emphasis on industrial policy should not be confused
with a simple return to statism or import-substitution. Despite its ubiquity, the common
portrayal of economic liberalization in developing countries as a “single-dimensional”
progression from “inward-oriented development strategies” toward “neoliberal,
free-market policies” is antiquated and overly simplistic in its assumptions (Kurtz and
Brooks 2008, 278). The statism/neoliberalism continuum implies that these positions
are mutually exclusive. However, pursuing economic orthodoxy in one policy realm in
no way precludes a country from pursuing a more statist approach in another policy
realm. An increasingly common paradigm in Latin America, labelled
“neo-structuralism” by the Economic Commission for Latin America and the Caribbean
(ECLAC), combines an open economy and emphasis on macroeconomic stability, with a
developmentalist industrial policy scheme that actively supports productive activities
(Bielschowsky 2009).
Despite its prevalence, little has been written about the different schemes and
determinants of industrial policy in contemporary Latin America. Instead, the
ever-expanding body of literature seeking to explain what comes after neoliberalism in
Latin America largely ignores industrial policy: focusing instead on partisanship,
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electoral institutions and expanding social spending. Much of what has been written
about industrial policy comes in the form of policy recommendations, econometric
policy evaluations, or descriptive case studies of specific countries’ industrial policy
repertoires (Alonso 2003; Fairlie 2003; Scarone 2003; Agosin et al. 2010; Baz et al.
2010; Melendez & Perry 2010; IDB 2014). These reports are informative, but narrow in
their scope. Only a handful of works have endeavored to present a more comprehensive
and cross-national overview of industrial policy in Latin America (Peres 1997; Melo
2001; Melo and Rodríguez-Clare 2006; Peres and Primi 2009; Peres 2011).
With this paper I hope to begin to construct a framework for comparing national
industrial policy schemes, and explaining variations across Latin America. As such, my
empirical work has two stages. The first stage is purely descriptive and entails
categorizing several countries’ industrial policy repertoires based on a number of
pre-established criteria. In the second stage I propose an historical-institutionalist
explanation for the differences in policies that are observed across the region. Any
evaluation of policy impact is outside the scope of this paper.
This paper is organized as follows. In Section II I review the literature on
contemporary industrial policy in Latin America, paying attention first to theory and
then to practice to establish criteria for classifying national industrial policy schemes. In
section III I outline the causal factors I see as the most likely determinants of industrial
policy choices. In Section IV I explain my methodology. Then, in Section V I outline the
history of Latin American industrial policy to better contextualize my own work. In
section VI, I offer brief descriptions of the national industrial policy schemes of six Latin
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American countries. Then, in section VII I present historical-institutional case studies of
two of these countries. Finally, I offer some concluding thoughts and suggestions for
further research in Section VI.
II. Theory and Practice
The resurgence of industrial policy over the past two decades has been mirrored
by an emerging consensus in favor of its theoretical underpinnings. Industrialization
has long been heralded as the road to development. Sustained economic growth requires
continuous industrial upgrading and technological advance (Lin and Chang 2009). At
its core, industrial policy is based on the belief that economic and industrial progress in
developing countries requires some form of government intervention. Rodrik (2004)
argues that underdeveloped economies are more prone to private market failures, and
thus require government intervention in order to correct for these failures. Today, this 3
once-controversial claim is accepted by a growing number of academics and
policymakers. Even the World Bank, long renowned for its market fundamentalism,
now endorses an admittedly muted form of industrial policy (Lin 2012). The Manichean
statism-versus-neoliberalism debate has been largely discarded in favor of a more
3 Rodrik (2004) outlines three types of externalities that industrial policy can potentially correct for - technological, informational, and coordinational. Technological externalities, the most common rationale for industrial policy, are any benefits from technological innovation that innovators are unable to capture in a private market. Often, innovation externalities are addressed via an intellectual property system that effectively assigns property rights to innovative concepts and designs. Similarly, information externalities are generated by the poorly remunerated process of cost structure discovery that is a necessary part of product diversification. These externalities are different from technological externalities, because they are generated not by innovation and R&D, but by the process of discovering whether a good can be produced at home at a low cost. They also explain why productive diversification is unlikely without government intervention, as Rodrik writes, “market prices cannot reveal the profitability of resource allocations that do not yet exist” (Rodrik 2004, 7). Finally, coordination externalities stem from the fact that many projects require “simultaneous, large-scale investments to be made in order to become profitable” (Rodrik 2004, 12). For instance, imagine an agricultural project for which success depends on outside factors such as access to an electrical grid, irrigation, and transportation networks. Private entities are unlikely to provide these services unless they are sure that the agricultural project will succeed.
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nuanced debate about the optimal level and form of government intervention in the
economy.
The discourse regarding the optimal level of government intervention can be
organized around three major points of contention: scope of application, instrument
type, and form of structural change. In regards to scope, policies can be categorized as
either horizontal or vertical. Horizontal policies, also known as neutral policies, are
designed to affect the business climate as a whole or general activities that have large
externalities (e.g. research and development [R&D], export promotion, foreign direct
investment [FDI], etc.), whereas vertical policies target specific sectors or firms. 4
Industrial policy instruments have proliferated over the past two decades, but can be
broadly grouped into two types: public inputs and market interventions. Public inputs
tend to be horizontal and are intended to provide a level playing field for private
competition. They include measures to strengthen regulatory and legal frameworks,
lower barriers to entry for businesses, and provide investment in infrastructure. Market
interventions can be either horizontal or vertical, but necessarily entail some sort of
active government reallocation of resources and incentives. These policies include
subsidies, fiscal incentives, and financial incentives (Agosin et al. 2010; Rodríguez-Clare
2011; IDB 2014). By definition, all industrial policies seek to change a country’s
productive structure. A distinction, however, is drawn in regards to policies designed to
strengthen existing comparative advantages versus policies designed to create and foster
new comparative advantages. This distinction reflects a broader debate in development
4 In practice, no policy is truly “neutral”. Because horizontal policies seek to raise the efficiency of certain production factor markets (labor, capital, raw inputs, etc.), and different sectors use these factors in different proportions, these policies will ultimately favor certain sectors over others (Peres 2006).
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economics over whether developing countries should look to specialize or diversify their
economies (Hausmann et al. 2008; Lin and Chang 2009). In table 1 (see Appendix), I 5
use these three dimensions - scope of application, instrument type, and form of
structural change - to create a broad typology of industrial policies. Emanating from the
top left corner, the x and y axes of this table can be conceptualized as representing an
increasing level of government intervention, such that horizontal public inputs entail the
lowest level of government intervention, while vertical market interventions targeted at
creating new comparative advantages entail the highest level of government
intervention. Given fears about the distortive nature of government allocation of
resources (i.e. “government shouldn’t pick winners”), the more intervention a policy
entails, the less consensus there tends to be in favor of it.
Since the mid-90s nearly every Latin American country has developed some sort
of industrial policy repertoire. These repertoires are diverse and multifaceted, but tend
to highlight some combination of six priority areas: (1) investment and output growth,
(2) export promotion, (3) competitiveness, (4) FDI attraction, (5) science and
technology (innovation), and (6) small and medium-sized enterprises (SMEs) (Melo
5 Many economists point to the principle of comparative advantage as an argument for specialization. They reason that in order to increase productivity, developing countries must specialize in the industries in which they hold a comparative advantage. Ju et al. (2011) found that, “industrial policies may make people worse off than in market equilibrium if the government picks an industry that deviates from the comparative advantage of the economy” (1). However, other economists contend that economic development requires diversification of the productive structure. In other words, developing countries should seek out new production activities, and attempt to develop a range of different sectors. In their cross-national examination of sectoral concentration in relation to per capita income, Imbs and Wacziarg (2003) observed that countries’ levels of sectoral concentration tend to follow a U-shaped curve over the course of development. Earlier stages of development correlate with diversification up until a certain level of per capita income, at which point the countries begin specializing and sectoral concentration rises again. Klinger and Lederman (2004) find a similar, albeit inverted, U-shaped curve when they graph the number of new export products in a country against income. Both of these findings seem to support the theory that developing countries should attempt to diversify, rather than specialize their productive structure.
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2001; Melo and Rodríriguez-Clare 2006). Investment and output growth policies entail
using an array of fiscal and financial measures to incentivize producers to increase
output. Export promotion policies use similar incentives to encourage producers to
export. Competitiveness policies look to increase competition between firms. FDI
attraction policies aim to increase foreign investment in domestic industry. Science and
technology policies support R&D in pursuit of innovation. SME policies specifically
support smaller firms, which are often more vulnerable to market failures. This is not an
exhaustive list, and there is significant overlap between some of the categories.
Nevertheless, a focus on these six priority areas in conjunction with the three
dimensions of policy design considered above provides a robust framework for
evaluating national industrial policy repertoires.
III. Explaining Variations in Industrial Policy Repertoires
A number of scholars have sought to explain cross-national variations in
economic reform in Latin America based on electoral institutions and partisanship.
While some have found that regionally there is no consistent and direct causal link
between government partisanship and economic policy reform, others have found
evidence for more nuanced relationships (Stokes 2001; Johnson and Crisp 2003).
Flores-Macías (2012) offers convincing evidence of a link between party system
institutionalization and economic reform. Focusing on a range of economic policy
reforms pursued by recently elected left-wing governments in 10 Latin American
countries, he finds that leftist governments in countries with poorly institutionalized
party systems are more likely to pursue statist economic policy reforms. Kurtz and
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Brooks (2008) take a different approach, eschewing the aforementioned
statist/neoliberal continuum in favor of rating national economic agendas on separate
indices for economic openness and statism. They find that most Latin American
countries either score high on the economic openness index and low on the statism
index (“orthodox neoliberalism”), or score high on both indices (a position they name
“embedded neoliberalism”). Their regression analysis indicates a significant relationship
between economic agenda type and the interaction of government partisanship and
labor union strength, such that left-wing governments are more likely to pursue
embedded neoliberalism in countries where unionization rates are high, whereas
right-wing governments are more likely to pursue embedded neoliberalism in countries
where unionizations rates are low. They also find that countries that reached a more
advanced level of ISI before the 1982 debt crisis are more likely to be pursuing
embedded neoliberalism than orthodox neoliberalism.
Despite these findings, I don’t expect either electoral institutions or partisanship
to be significant predictors of industrial policy strategies. Flores-Macías (2012) largely
overlooks industrial policy. The five dimensions of economic reform he uses are:
“privatizations/nationalizations,” “taxation,” “government spending,”
“trade/financial/monetary liberalization,” and “poverty alleviation” (32). While there
are links and complementarities between each of these and industrial policy, none of
them capture the full scope and form of industrial policy. Kurtz and Brooks’ (2008)
work is more relevant, because there theoretical argument hinges on industrial policy.
They characterize embedded neoliberalism as involving “strong public intervention to
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enhance international competitiveness,” “substantial public resource commitments,”
and “state-business linkages” (2008, 244). Nevertheless, their empirical work fails to
properly account for industrial policy. Their “scope of state interference” and “economic
liberalization” indices, with which they categorize countries as either orthodox
neoliberal or embedded neoliberal, use similar dimensions as Flores-Macías: trade
reform, financial reform, tax reform, capital account liberalization, privatization, and
government consumption. Because contemporary industrial policy is implemented
within a context of economic liberalization, the first four of these dimensions are largely
unrelated to industrial policy. The World Bank government consumption indicator,
which Kurtz and Brooks use to “capture the broadest range of state fiscal intervention,”
is much too broad to measure industrial policy efforts (Kurtz and Brooks 2008, 253).
According to the World Bank this indicator, “includes all government current
expenditures for purchases of goods and services…[and] most expenditures on national
defense and security” (World Bank 2015). This is a good measure of the scope of the
state, however, given that industrial policy-related spending only makes up a small part
of total government consumption, it is unlikely that this variable detects variations in
industrial policy efforts across countries. Furthermore, important aspects of
contemporary industrial policy such as regulatory measures and tax exemptions are not
accounted for by the government consumption indicator. Consequently, Kurtz and
Brooks’ indices are inadequate when it comes to capturing the extent and form of
industrial policy as practiced in Latin America.
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Given industrial policy’s lack of politicization, and contentious history in Latin
America, I expect that historic and institutional factors will be the greatest determinants
of cross-national variations in contemporary industrial policy repertoires. The debate
around industrial policy strategy is certainly ideologically-loaded, however it does not
seem to be an issue that has been politicized. Peres (2006) points out that “changes of
government, even when they have meant a sharp break with a country’s political past, as
in Mexico in 2000 or Uruguay in 2005, have not led to great alterations in [industrial]
policy stances” (74). Instead, I expect that historical and institutional factors,
particularly the transformation of each country’s economic bureaucracy before and after
the crisis of ISI, will be the most significant predictors of contemporary industrial policy
strategy. Active and strategy-driven industrial policy requires a large and capable
economic bureaucracy, so in countries that saw their economic bureaucracies
dismantled as part of neoliberal reforms I expect a low-intervention industrial policy
repertoire. Likewise, the countries in which economic bureaucracies remained largely
intact through the 1980s and 1990s should now have the most aggressive and
interventionist industrial policy repertoires. Furthermore, I argue that the nature of this
transformation is dependent on the degree of ISI’s success in each country. In countries
that were able to develop internationally competitive domestic industries in higher-skill
sectors under ISI, I expect an entrenched economic bureaucracy. Where ISI failed to
develop such industries, or was interrupted early, I expect a weaker economic
bureaucracy.
IV. Methodology
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Because there is very little reliable data on industrial policy, especially
cross-nationally, and my independent variables are difficult to operationalize, I employ
a largely qualitative methodology. I begin with a brief historical overview of the
changing role of industrial policy in the region. I then evaluate primary and secondary
sources regarding contemporary industrial policy in six Latin American countries on the
four dimensions developed above - scope of application, instrument type, form of
structural change, and policy priority areas. Finally, I look to explain the two of these
national industrial policy strategies - Chile’s and Brazil’s - by means of historical case
studies that focus specifically on the evolution of these two countries’ economic
bureaucracies. I chose these two countries because they have markedly different
strategies, and strong institutional capacity. This second consideration is important,
because in countries with weak institutional capacity there is a formidable gap between
the industrial policy strategy and practice, which poses an analytical challenge.
V. Historical Context
ISI period (1940s-1980s)
Industrial policy is by no means a new phenomenon in Latin America. Beginning
in the 1940s and 50s, most Latin American countries pursued industrial development by
means of the import-substitution-industrialization (ISI) model.
“Import-substitution-industrialization” refers to the process of replacing foreign
imports with domestically produced goods. The ISI model, developed by Hans Singer,
Raúl Prebisch, and other Latin American Structuralists at the Economic Commission for
Latin America and the Caribbean (ECLAC), was devised as a way to break what they
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perceived as a cycle of dependency and underdevelopment. Under the ISI model, which
the majority of Latin American countries adopted to some extent, the state took on a
central role in protecting domestic industries by maintaining multiple exchange rates,
and assigning high tariffs and restrictive quotas (Bruton 1998; Ros 1993). The state also
nurtured their domestic manufacturing sectors by providing them with production
subsidies, so that they could compete with imports in the domestic market. The
subsidies tended to target the manufacturing sector as it was seen as the sector with the
greatest potential for industrial upgrading and productivity growth (Melo and
Rodríguez-Clare 2006).
Neoliberal Reforms (1980s-1990s)
The ISI model entailed large-scale industrial development and infrastructure
programs that the government funded by means of loans from foreign creditors. As long
as the Latin American economies continued to grow, public and private banks were
willing to lend to them, which resulted in these same Latin American countries
accumulating a massive amount of debt by the late 1970s. In 1970 the total outstanding
debt for all of Latin American was only $29 billion. By 1978, this figure reached $159
billion. By 1982, Latin American debt reached its peak at a startling $327 billion, of
which at least 80 percent was sovereign debt (FDIC 1997). Sustained international
economic growth and low interest rates on loans enabled Latin American countries to
service their growing debt throughout the 1970s. However, a tightening of monetary
policy in the US and Europe, and a worldwide economic recession in the early 1980s
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spelled huge trouble for the indebted Latin American countries (Devlin and
Ffrench-Davis 1995).
In August of 1982, Mexico became the first country to announce that it would be
unable to pay back its loans on schedule. Ultimately, sixteen Latin American countries
were forced to reschedule their debt payments (FDIC 1997). To help with the payments,
public lending institutions such as the World Bank and the International Monetary
Fund (IMF), as well as commercial banks in the US agreed to loan money to Latin
American countries on the condition that they make certain drastic economic
adjustments. These adjustments, collectively called the Washington Consensus,
amounted to a total repudiation of the ISI model in favor of a neoliberal regime. This
new neoliberal economic model was based on the doctrine of free and open markets.
The state, which was an integral part of the ISI model, saw its role drastically reduced:
tariffs were slashed, and subsidies for domestic industries were cut. The swift transition
from closed to open economy proved disastrous, as much of the domestic industry
proved unfit for the challenges of international competition.
In the neoliberal perspective, any government intervention in the economy is
seen as an unnecessary and potentially damaging distortion of the free market. So, by
definition, neoliberalism and industrial policy are largely incompatible. Proponents of
neoliberalism argued that ISI industrial policy distorted resource allocation and led to
inefficiencies that further fuelled inflation and trade imbalances Melo and
Rodríguez-Clare (2006) write, “the possibility that there could be a set of productive
development policies both consistent with the structural reform process and necessary
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under the new conditions of more open economies was frequently rejected out of hand”
(11). As such, most Latin American countries completely dismantled their industrial
policies during the 1980s, relying instead on the incentives of the free market to raise
the competitiveness and productivity of their industries (Peres and Primi 2009). 6
Open Economy Industrial Policy (1995-)
Nevertheless, in the mid-1990s, spurred in large part by a recognition of the
effectiveness of industrial policy in the successful industrialization of the “East Asian
Tigers,” and dissatisfaction with low rates of growth under the neoliberal regime, Latin
American countries turned again to industrial policy. The new brand of industrial 7
policies that began to emerge during the 1990s sought the same goals of development
and industrialization as the ISI-era policies, but sprung from a wholly distinct logic. The
new policies were implemented into open economies that were already highly integrated
into the international market. The policies also were subtler than their predecessors.
Rather than high tariffs and direct subsidies for whole industries, new policy
instruments included tax breaks, tariff exemptions, and low-interest financing designed
to “facilitate-rather than suppress-international competition” (Kurtz and Schrank 2005,
675). In many countries, particularly Brazil, the marriage of export-oriented growth
with an active industrial policy agenda resulted in a “renewed and updated”
developmentalist strategy that sought to augment inadequate credit markets with
state-owned development banks (Hochstetler and Montero 2013).
6 Peres (2006) writes, “In the early 1990s, it was common to hear from top [Latin American] macroeconomic policy officials the dictum that, ‘the best industrial policy is no industrial policy’” (69). 7 The East Asian tigers are Hong Kong, Singapore, Taiwan, and South Korea. According to Kurtz and Schrank (2005), the 1993 publication of the World Bank’s East Asian Miracle report was a turning point in the industrial policy debate.
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There is general consensus that the current open economy industrial policy
agenda followed by most Latin American countries is far superior to the old closed
economy strategy. Whereas the old policies were often subject to corruption and capture
by rent-seeking producers, the new policies curb this behavior by conditioning benefits
on certain performance requirements (Rodrik 2004). The focus on subsidies and
incentives for exporters has the benefit of rewarding the most efficient producers (i.e.,
those that are able to compete in the international market). Kurtz and Schrank (2005)
find prima facie evidence that Latin American countries with a greater battery of export
promotion policies have also had higher growth of non-traditional exports.
VI. National Industrial Policy Schemes
Overview
The industrial policy strategies of the six countries I examined - Argentina, Brazil,
Chile, Colombia, Mexico, and Peru - are undoubtedly more similar than dissimilar. All
have the same broad goals of increased productivity, competitiveness, efficiency, and
international integration. Furthermore, they all operate within the same general
macroeconomic constraints. The popular ISI-era tactics of exchange rate manipulation
and trade protectionism are no longer seen as viable industrial policy options. Due to
this narrowed policy space, the variations between countries tend to be less pronounced
than in previous eras. These six countries more or less share a lowest common
denominator of horizontal industrial policies aimed at providing a level playing field for
private competition. While some countries are certainly more effective at implementing
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these measures, there does not seem to be a tradeoff between them and policies that
entail greater intervention.
Nonetheless, employing the analytical framework outlined above, it is possible to
distinguish certain differences across each country’s industrial policy configuration.
Salient distinctions can be made in regards to no not only the types of policies being
designed, but also the approach each country takes to policymaking. Melo and
Rodríguez-Clare’s (2006) characterization of industrial policymaking styles as either
demand-driven or strategy-driven proves particularly useful. A strategy-driven
approach involves a top-down system in which the government agencies in charge of
designing industrial policy provide clear definitions of strategic goals for the long-term,
and implement policies in support of these explicit goals. Demand-driven approaches
emphasize the importance of responding to the needs of existing private firms or
sectors, and tend to be reactive and short-term oriented (Melo and Rodríguez-Clare
2006). Both approaches can employ the full range of contemporary industrial policies,
however, the strategy-driven approach necessarily reflects a greater faith in the ability of
government to productively intervene in the private market and guide development. In
the following sections, I detail the main institutional actors, policy instruments, and
goals of the industrial policy schemes in the six countries I examined.
Argentina
Argentina has a relatively minimal, and demand-driven national industrial policy
scheme. In contrast to most other Latin American countries, basic horizontal public
inputs such as macroeconomic and regulatory stability have largely deteriorated in
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Argentina since the late 1990s (Loayza et al. 2007). Furthermore, Argentina’s recurring
credit crises and defaults have rendered FDI attraction efforts ineffective. Over the past
decade, Argentina’s industrial policy scheme has centered around horizontal support to
SMEs, investments, and exports. The most common policy instruments are subsidized
loans and tax credits. Much of the export-oriented financing is distributed by the public
development bank BICE (Banco de Inversión y Comercio Exterior). Recently, a number
of vertical policies that target the software and agricultural biotechnology sectors, and
are administered as part of the Argentine Technology Fund (FONTAR), have emerged.
As evidenced by the country’s stagnant export sophistication and diversification rates,
Argentina has almost no policies to remedy the information and coordination failures
associated with productive diversification (i.e. the discovery of new comparative
advantages). Argentina’s industrial policy scheme is driven by the demand of existing
sectors rather than an overriding strategic goal (Sánchez et al. 2011).
Brazil
Brazil offers the best example of a strategy-driven approach and boasts Latin
America’s most comprehensive and ambitious national industrial policy scheme.
Despite the privatization of several parastatals, the Brazilian government continues to
occupy a critical role as both an owner and investor in its economy. It is estimated that
the state is a substantial shareholder in up to 20 percent of the companies listed on the
Brazilian stock exchange Bovespa (Ban 2012). Brazil’s priorities include the
internationalization of major firms and sectors, and intensive infrastructure-building,
and energy strategies. Furthermore, they have emphasized the importance of
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technological innovation through large investments in R&D (Hochstetler and Montero
2013).
The main driver of Brazil’s industrial policy scheme is its national development
bank BNDES (Banco Nacional de Desenvolvimento Economico e Social). BNDES
actively supports nearly all of Brazil’s major industries through the provision of
long-term capital. It’s operations are extensive, and it ranks as one of the most active
development banks in the world. While the bulk of BNDES’ loans go to large and
established firms, it also provides a substantial amount of finance to SMEs through a
program called Cartão BNDES. In addition to BNDES, Finep (Financiadora de Estudos e
Projetos), a public agency under the direction of the Ministry of Science and
Technology, distributes loans and grants in support of R&D to universities and research
centers, as well as private firms (Hochstetler and Montero 2013).
Chile
Since the 1990’s, Chile’s industrial policy repertoire can be largely characterized
as well-coordinated, horizontal, and export-oriented. Chile’s premier development
agency/bank, CORFO (Corporación de Fomento de la Producción) is the driving force
behind much of Chile’s industrial policy design, and tends to focus on horizontal public
input measures in support of export promotion, innovation, and SME financing. One of
the only major departures from both policy neutrality and support for existing sectors is
the Fundacion Chile (FCh), a semi-public venture capitalist/innovation incubator with a
sterling track record of diversifying Chile’s production structure. In fact, after copper
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and mining products, all three of Chile’s top exports - grapes/wine, salmon, forestry
products- benefited from targeted government support (Agosín et al. 2010).
Outside of CORFO, the National Commission for Scientific and Technological
Research (CONICYT), which is overseen by the Education Ministry, is a major provider
of funding for innovation. CONICYT tends to support the technological supply of
innovation, while CORFO is best understood as supporting the entrepreneurial demand
for said innovation, and the diffusion of technological advancements. As such, their
operations are often complementary. Much of the funding for both of these programs
comes from the mining “royalty,” a 3 percent tax surcharge on all mining profits which
is distributed by CNIC (Consejo Nacional de Innovación para Competitividad) (Agosin
et al. 2010).
Colombia
Beginning with trade liberalization in 1991 during César Gaviria presidency
(1990-1994), Colombia shifted from an ISI-style industrial policy, to a focus on
competitiveness policy and increased collaboration between the public and private
sectors. Colombia’s national development structure, the SNCeL (Sistema Nacional de
Competitividad e Innovación) is headed by the CNC (Comision Nacional de
Competitividad), a commission comprised of representatives from the government,
private sector, academia, and labor groups. The centerpiece of Colombia’s industrial
policy scheme is a series of 41 “competitiveness agreements,” each negotiated with
individual sectors between 1998 and 2006, that entail specific government
commitments in regulation, trade policy, and infrastructure (Melendez & Perry 2010).
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This type of emphasis on public-private collaboration is characteristic of Colombia’s
bottom-up, demand-driven approach to industrial policy.
In the early 2000’s Alvaro Uribe’s first administration (2002-2006) worked to
establish a “Domestic Agenda” (Agenda Interna para la Productividad y Competitividad)
that complemented the development of a free trade agreement with the US in 2006. The
DNP (Departamento Nacional de Planeación) took a leading role in identifying export
opportunities under the FTA. There was also a focus on mitigating the impact of
increased import competition from the US. More recently there has also been a
proliferation of public agencies involved with different aspects of industrial policy
(Melendez & Perry 2010).
Mexico
While largely succeeding in maintaining macroeconomic stability, the Mexican
government has failed to provide many of the microeconomic inputs needed for
economic growth. Mexico’s business environment is characterized by an onerous fiscal
regime, rigid labor regulations, and high competitive barriers. Seeing as approximately
99 percent of Mexican firms are SMES, it is no surprise that much of Mexico’s industrial
policy repertoire, as elaborated in their development plan PND (Plan Nacional de
Desarrollo), focuses on providing horizontal support for these smaller enterprises. In
addition to the support for SMEs, the central institution of Mexico’s industrial policy
design, the Ministry of Economy, also provides vertical support to the following strategic
sectors: automotive, aerospace, electric/electronic, energy, biotechnology, software, IT
and BPO services, logistics and tourism (Secretaria de Economía 2008). In many ways,
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Mexico ‘s industrial policy repertoire is shaped by its involvement in NAFTA. Access to
the US market is a huge boon, but Mexico’s initial entry to NAFTA revealed massive
inefficiencies in it private sector. The Mexican government has looked to exploit the
opportunity provided by NAFTA via substantial support for the Mexican manufacturing
sector in the form of export-processing-zones (EPZs) along the Mexican-US border (Baz
et al. 2010)
Peru
Much like Chile, Peru has focused its industrial policy efforts on providing the
horizontal public inputs that facilitate an equitable and easily-navigated business
environment. Additionally, the country has implemented a number of horizontal
intervention instruments designed to promote exports. Beyond pursuing preferential
trade agreements, the Peruvian government has provided export incentives in the form
of drawbacks on import tariffs for exporting forms. Peru’s national development bank
COFIDE (Corporacíon Financiera de Desarrollo) provides substantial financing to SMEs
through a microfinance program. One of the only significant vertical intervention
policies in Peru is the establishment of production and export Free Zones in certain
regions (Tello and Tavara 2010).
VII. Institutional Transformations in Brazil and Chile
In many respects, Chile is an outlier from the rest of Latin America. Following the
1973 military coup that deposed the socialist president Salvador Allende, Chile became
the earliest and most thorough adopter of market fundamentalism. General Augusto
Pinochet and his economic advisors, many of whom had studied with Milton Friedman
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at the University of Chicago, set about dismantling ISI in favor of a neoliberal,
export-oriented industrialization (EOI) scheme that cut trade tariffs, and drastically
diminished the government’s role in the market. The shift from ISI and Allende’s forays
into socialism to neoliberalism was abrupt and fundamentally changed the structure of
Chile’s economic bureaucracy (De Mattos 2002).
Chile’s premier development agency/bank, the Production Development
Corporation (Corporación de Fomento de la Producción, CORFO), was first founded in
1939. Up until the military coup against Allende in 1973, CORFO was charged with
supporting an import substitution development strategy. Under Pinochet’s rule, vertical
industrial policies were almost entirely avoided. Chile’s free market economists
eschewed the thought that the state was capable of “picking winners,” and instead
focused on regulation and horizontal policy instruments (Agosín et al. 2010). In the
1980s, a recognition of the vital importance of export promotion led to a shift in the
balance of power within government from the Ministry of Economics to the Ministry of
Foreign Affairs (Melo and Rodríguez-Clare 2006). As part of this shift, ProChile, an
export promotion agency, was established under the purview of the Ministry of Foreign
Affairs (Agosín et al. 2010).
Nevertheless, CORFO was not disassembled and it maintained sectoral support
for a handful of industries that were identified as having high potential for export
growth. These isolated instances of vertical intervention are evidence of the continued
institutional capability of the Chilean state, despite the reduction of its role. Kurtz
(2013) writes, “notwithstanding the degree of commitment to neoliberal minimalism at
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times characteristic of the military government, and its destruction of institutions in the
political arena, the basic trajectory of institutionalization and professionalization of the
public administration in Chile continued through the dictatorship and into the
succeeding years” (154). What developed in Chile was a reduced, but highly effective
economic bureaucracy.
Brazil also represents an exceptional case. The Brazilian economic bureaucracy
remained largely intact in the face of both the 1982 debt crisis and the 1985 return to
democracy. Ben Ross Schneider (1991) notes the resiliency of the developmental state in
Brazil, writing, “Despite three changes of regime and the economic and social
transformation of the past half century, there are many apparent similarities in policy
making across the military regime and the civilian regimes that preceded and succeeded
it” (218). The regional pendulum swing from statism to market orthodoxy was much less
pronounced in Brazil. Instead of dismantling the industrial policy system, the crisis of
ISI led to a reevaluation and rearticulation of industrial policy. The new style of
industrial policy replaced the protectionist logic of ISI with emphases on
competitiveness and innovation. While macroeconomic instability constrained the
expansion of industrial policy throughout the 1980s and early 90s, the success of the
Real Plan allowed for the implementation of the renewed model of industrial policy
beginning in the late 1990s (Hochstetler and Montero 2013).
In both the Brazilian and Chilean case, the nature of the transformation of the
economic bureaucracy during the transition to neoliberalism seems to be linked to the
extent to which the ISI model achieved its goals of domestic industrialization. Figure 1
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(see Appendix) shows Brazil and Chile’s rates of value added in manufacturing as a
percentage of GDP between 1960 and 1989. This measure of the change in value
between manufacturing inputs and outputs shows the degree of sophistication and
growth of each country’s manufacturing sector. The two countries have relatively similar
rates until around 1973, when Chile’s rate dives, and Brazil’s continues to grow into the
1980s. Even after the transition to neoliberalism, ISI’s economic legacy endured in the
form of each country’s productive structure. To this end, figure 2 (see Appendix) breaks
down Chile and Brazil’s total exports in 1992 by technological classification. Only 8% of
Chile’s total exports are classified as either high, medium, or low tech. Comparatively,
51% of Brazil’s exports fall into these categories (World Bank 2015). These trends offer
evidence that the early interruption of ISI in Chile may have rendered its economic
bureaucracy an easy target for neoliberal reforms. In contrast, the relative of success of
ISI in Brazil likely entrenched the economic bureaucracy there, protecting it from the
worst of the neoliberal reforms.
VIII. Conclusion and Future Research
By and large, industrial policy does not fit into the mainstream narratives about
globalization, economic reform in the developing world, or the rise of the Latin
American left. The oft-proffered and stylized view of globalization holds that economic
liberalization entails a unidirectional reduction of state involvement in the economy.
Furthermore, the nebulous relationship between industrial policy and political ideology
renders it an analytical challenge for scholars focused on the rise of the Latin American
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left. What is to be made of the coinciding resurgences of the electoral left and
pro-business industrial policy?
With this paper I aimed to provide a starting point for resolving some of these
ostensible contradictions. By differentiating between industrial policy schemes and
focusing on the particular historical-institutionalist roots of the economic bureaucracies
that are charged with devising and implementing said industrial policy, I have
attempted to navigate these stumbling blocks. Rather than a vestige of old
inward-oriented development strategies, contemporary industrial policy appears to be
the defining characteristic of an emerging and understudied paradigm for development.
A paradigm that is largely conditioned on the transformation of each country’s economic
bureaucracy during the transition from ISI to neoliberalism.
Future research should look to both develop a more detailed criteria for
comparing national industrial policy schemes, and to distinguish a more precise causal
mechanism for the transformation of each country’s economic bureaucracy. In
particular, adding a dimension for institutional capacity would allow for a separation of
industrial policy strategy and practice. Better defining and even codifying the dependent
variable - contemporary industrial strategies - will allow for greater clarity in
determining how these outcomes were effected. Also, more attention should be paid to
possible complementarities between industrial policy and other realms of economic
policy.
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Appendix
Table 1. An Industrial Policy Instrument Typology. Source: Adapted from Rodriguez-Clare (2011), and IDB (2008).
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Table 2. Overview of Industrial Policy Systems in 6 Latin American countries. Source: Compiled by author.
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Figure 1. Annual Value Added in Manufacturing (% of GDP) in Chile and Brazil, 1960-1989. Source: Compiled from World Bank, World Development Indicators.
Technological Classification of Exports
Brazil Chile
High Tech 4% 0%
Low Tech 21% 4%
Medium Tech 26% 4%
Primary Products 23% 64%
Resource Based 25% 27%
Table 3. Percentage of Total Exports by Technological Classification for the Year 1992. Source: Compiled from World Bank, World Integrated Trade Solutions.
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