IDB study proposes a new generation of productive development policies to boost growth in Latin America and the Caribbean

Taking into account Latin America’s long history of industrial policies that have often done more harm than good, a new study by the Inter-American Development Bank (IDB) outlines when and how governments can intervene in an economy to boost productivity, while minimizing the risks of repeating past mistakes.

In the IDB’s flagship research publication Development in the Americas, researchers examined successful as well as failed industrial policies worldwide to come up with a pragmatic and forward-looking framework aimed at helping decision-makers find the right mix of productive development policies, taking into account the realities of each country.

“Industrial policies have fallen into disrepute because they often involved political favoritism, wasted resources, rent-seeking and corruption,” said Santiago Levy, the Vice President of Knowledge and Sectors at the IDB. “However, we believe that provided appropriate institutions are in place, under certain circumstances well-crafted government interventions can help boost productivity, and we are providing a new conceptual framework for that purpose.”

While Latin America and the Caribbean region has made considerable economic and social progress over the past decade, the region still lags wealthier nations in productivity growth, which explains lower levels of income and well-being. Indeed, creating the conditions to foster productivity growth is one of the main development challenges facing policymakers in the region today.

There is wide acceptance to the view that governments have an important role in helping the private sector become more competitive in a global economy. But with the region´s history of costly failures – from the informatics industry in Brazil to the rice producers in Costa Rica – industrial policy came to be viewed as a public sector overreach.

The groundbreaking study – titled Rethinking Productive Development, Sound Policies and Institutions for Economic Transformation – helps policymakers determine under what conditions it is useful to intervene and, if so, what would be the best tools to do it.

Governments need to ask themselves what market failures a new policy seeks to redress, what instruments could be used to resolve this failure and, importantly, what types of institutions are necessary to develop the policy with success. Given the unique circumstances of each economy, instead of seeking out and imitating best practices, decision-makers ought to choose policies that best match the economy´s institutional capacities.

The book looks at the best available data and lays out a methodology to address how Latin America and the Caribbean government leaders can rethink policies of productive development to emphasize integration with global value chains, generate innovation, improve human capital, foster entrepreneurship and promote internationalization, with the public and private sectors working together.

Some of the issues addressed in the study include

• Why is the “best practices” approach to productive development policies flawed?
• Why did Asian countries do better at industrial policies than Latin American ones?
• Should governments help small and mid-sized firms?
• How would successful export promotion work?
• How do you deal with the problem of free riders benefiting from the initial risks taken by pioneers?

The study is rich in case studies, including

• A contrast between Brazil´s policies to support Embraer and the informatics sector
• How Costa Rica gave rise to a whole new medical equipment industry
• How the Mexican state of Durango successfully lured foreign auto parts firms
• Why intervening in rice markets worked in Argentina but failed in Costa Rica.

“This book is not ideological,” said José Juan Ruiz, the IDB’s Chief Economist. “It is based on analysis and evidence. Increasingly, the question is not whether to do productive development policies but how to do them. Sound policies will require new roles for public agencies, and more active involvement of the state in conjunction with the private sector.”