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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