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Development in the Americas (DIA) 2014

Rethinking Productive Development - IDB Flagship Publication



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  • English version



Industrial policy has often done more harm than good. The new conceptual framework presented in this book enables countries to adopt the productive development policies necessary to prosper while avoiding the mistakes of the past. The book rethinks productive development by examining the market failures impeding transformation and the government failures that may make the policy remedies worse than the market illness. Using a simple conceptual framework based on the scope and nature of the policy approach, the authors systematically analyze country policies in key areas such as innovation, new firms, financing, human capital, and internationalization. Recognizing that even the best policies will fail without the technical, organizational, and political capacity to implement them, the book concludes with ideas on how to design institutions with the right incentives, grow public sector capabilities over time, and foster constructive public-private collaboration.

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Working Papers and Technical Notes

  • Analysis of Several Productive Development Policies in Uruguay
  • Abstract:

    This paper reviews and assesses some of the Productive Development Policies currently being implemented in Uruguay. Three horizontal and three vertical policies are considered in light of the market and public failures they attempt to address and minimize. Horizontal policies comprise Innovation, Industrial Promotion and Directives for Industrial and Technological Development. Vertical policies include the analysis of Forestry Law, Meat Traceability and the Sustainable Production Project in the agricultural sector.

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  • Business-Government Interaction in Policy Councils in Latin America: Cheap Talk, Expensive Exchanges, or Collaborative Learning?
  • Abstract: While effective industrial policy requires close cooperation between government and business, there is little agreement on what makes that cooperation work best. This paper analyzes institutional arrangements for public-private cooperation and the character of private sector representation. Questions on institutional design focus on three main issues: i) maximizing the benefits of dialogue and information exchange; ii) motivating participation through authoritative allocation; and iii) minimizing unproductive rent seeking. Key elements in the nature of business representation through associations are the quality of research staff and internal mechanisms for reconciling divergent preferences within associations. The empirical analysis also disaggregates councils by scope (economy-wide versus targeted), function (trade, upgrading, technology, etc.), sector (agriculture, industry, services), and level (national, provincial, and municipal). Click here for more information.

  • Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective
  • Abstract: In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation. Click here for more information.

  • Impact Evaluation of Innovation and Linkage Development Programs in Costa Rica: The Cases of PROPYME and CR Provee
  • Abstract: This paper estimates the impact of two productive development programs (PDPs) in Costa Rica: PROPYME and CR Provee. The first seeks to increase the capacity of small and medium-sized firms (SMEs) to innovate, and the second aims to increase backward linkages between Costa Rican SMEs and multinational companies operating in the country. The impacts of each program were measured in terms of three result variables: real average wages, employment demand, and the probability of exporting. A combination of fixed effects and propensity score matching techniques was used in estimations to correct for any selection bias. The results show that both PROPYME and CR Provee have positive and significant impacts on SME performance. PROPYME’s beneficiaries performed better than other firms in terms of labor demand and their probability of exporting, while firms treated by CR Provee showed higher average wages, labor demand, and chances of exporting than untreated firms. Firms treated simultaneously by both programs performed better in terms of average wages than those that were only treated by CR Provee. This result is of special interest to policymakers since it indicates the importance of bundling in the implementation of PDPs. The findings suggest that policies aimed at overcoming the weaknesses of these two programs are important for obtaining higher real wages, generating more employment, and increasing the probability of exporting by Costa Rican SMEs. Click here for more information.

  • Industrial Policies in Colombia
  • Abstract:

    This paper surveys and analyzes industrial policies in Colombia, finding extensive use of productive development policies (PDPs) and despite claims of only moderate government intervention. Rarely explicitly associated with the need to address market failures, PDPs are instead associated with economic reactivation and vaguely defined “competitiveness.” There are also PDPs that address government failures considered unlikely to be corrected by first-best interventions. Colombia has made progress, however, in structuring an institutional setting for PDP design that is sufficiently linked with private sector groups to elicit information on constraints and opportunities that require government intervention. Nonetheless, the overall set of PDPs in place still lacks coherence and is not always guided by the policy requests of the private sector more widely defined.

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  • Industrial Policy in Chile
  • Abstract: This paper studies three horizontal policy instruments and two vertical ones in Chilean industrial policy, particularly regarding small and medium enterprises (SMEs). The horizontal instruments are (1) a guarantee program for borrowing by SMEs (FOGAPE), (2) a small subsidy to new exports that was applied from 1985 through 2003, and (3) the innovation subsidies provided by the Corporación de Fomento de la Producción (CORFO). The vertical policy instruments are the activities of Fundación Chile (FCh), a semi-public entrepreneur cum venture capitalist, and a CORFO program to attract foreign direct investment in information technology. Although most programs are well designed, they are numerous and insufficiently funded; Chile could benefit from a prioritization of needs and consolidation of these programs. Moreover, the instruments for making strategic bets on new sectors are particularly weak. In particular, FCh needs to refocus its activities on high-risk projects with long payoffs, something it cannot do with its small endowment. Click here for more information.

  • Industrial Policy in Guatemala: A Case of Policy Inertia under Changing Paradigms
  • Abstract: This paper reviews productive development policies (PDPs) in Guatemala, focusing on the alleged justification of existing programs in terms of the market or government failures they are meant to address. An effort is made to identify how the different instruments complement or contradict each other and how these situations came to be. The main hypothesis throughout the paper is that there are non-trivial contradictions within the set of PDPs and its implementation framework that render policy instruments ineffective or inefficient, with evidence from several case studies. On this basis and in light of international practices, the study develops a broad set of recommendations for improving the design and implementation of Guatemala’s PDPs. Click here for more information.

  • Institutions for Effective Business-Government Collaboration: Micro Mechanisms and Macro Politics in Latin America
  • Abstract: What makes for effective cooperation between government and business in industrial policy? Core research questions on the institutional design of arrangements for business-government interactions focus on three main functions: i) maximizing the benefits of dialogue and information exchange; ii) motivating participation through authoritative allocation; and iii) minimizing unproductive rent seeking. Countries with more experiences of public-private collaboration (PPC) tend to have more pragmatic governments and better organized and informally networked private sectors. Effective cooperation also depends on the macro context, in particular the nature of the political system and the alternative avenues it provides for business politicking, especially through parties, networks and appointments, the media, and campaign finance. Lastly, the structure and strategies of big domestic businesses -mostly diversified, family-owned business groups- affects their preferences and interest in collaborating in industrial policy. Click here for more information.

  • Productive Development Policies and Innovation Spillovers through Labor Force Mobility: The Case of the Brazilian Innovation Support System
  • Abstract: This paper focuses on two research problems. The first is to measure the direct impacts of innovation support measures in Brazil, and the second is to test the hypothesis of indirect effects of innovation policies on non-beneficiary firms through the labor mobility channel, whether resulting from direct support programs or indirect support via tax incentives. For this purpose, mobility is defined as the movement of workers in technical-scientific occupations, as identified by Araújo et al. (2009). It is found that, with the exception of a subvention program, direct support in the form of credit or cooperative projects fosters more innovative effort than tax incentives. Nonetheless, direct and tax-based incentives for innovation have different purposes, and sound innovation relies on both types of incentive. Click here for more information.

  • Productive Development Policies in Costa Rica: Market Failures, Government Failures, and Policy Outcomes
  • Abstract:

    This paper analyzes five Productive Development Policies (PDPs) implemented in Costa Rica, finding that they are not optimally addressing market failures. Moreover, government failures rather than market failures represent the main justification for PDPs. Even in the presence of market failures, the policy instruments applied are not necessarily the most economically efficient but rather the most politically feasible options. In addition, the lack of policy evaluation and monitoring prevents adjustments and corrections of such policies. Addressing the arguments for policy intervention and incorporating the results of evaluation into policy design and reform are necessary conditions for success. In spite of positive policy outcomes, limitations to enhance competitiveness and create the conditions for productivity growth are still present. An umbrella approach in the case of those PDPs that reinforce each other is necessary for productivity growth.

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  • Productive Development Policies in Jamaica
  • Abstract: Jamaica seems to be a puzzling case for economic growth: despite the structural reforms implemented in the last three decades and adequate investment levels, real GDP per capita is roughly the same as in 1970. The disappointing performance of this economy suggests that productive development policies (PDPs), including first-generation reforms, have not been enough to create a better environment for productivity growth. This paper examines the PDPs in Jamaica and concludes that behind the paradox of high investment and low growth of this economy are the "public debt trap" and a highly distortive tax incentive structure to attract foreign direct investment (FDI) and promote exports. Although industrial policy is moving towards a more modern conceptual design, the old schemes seem politically difficult to dismantle. Click here for more information.

  • Productive Development Policies in Latin America and the Caribbean: The Case of Mexico
  • Abstract: While Mexico has potential to grow rapidly, its economic growth has remained low for the past three decades. There is no consensus on the country’s development path or on how to achieve specific goals. Since the policy debate remains ideological and lacks pragmatism, productive development policies (PDPs) are often uncoordinated, redundant or even incongruent with each other. It is therefore important to understand the process whereby PDPs are designed and the institutional setting in which they are are implemented. This paper consequently examines whether PDPs respond to market failures and/or government failures. When PDPs are not designed to address specific market failures they can produce unwanted results or prove completely ineffective. When PDPs do address government failures, it is important to determine the reasons why the failure cannot be corrected in the first place and whether PDPs will be effective at addressing the problem in a second-best manner. Click here for more information.

  • Productive Development Policies in Latin American Countries: The Case of Peru, 1990-2007
  • Abstract: This paper assesses the institutional setting and productive impact of selected productive development policies (PDPs), institutions, and programs implemented in Peru during the period 1990-2007. The assessment is based on a simple, basic framework of a series of economic or market failures that may have constrained the transformation of the productive structure, the process of innovation, and the growth of total factor productivity. Evidence indicates that the PDPs and structural reforms implemented in Peru did not significantly alter the productive structure of the Peruvian economy. If the objectives of the PDPs are to transform the productive structure, increase total factor productivity, and enhance innovation, government interventions need to focus directly on the source of market failures and create quality productive changes within the private sector. Click here for more information.

  • Productive Development Policies in Panama: Self-Discovery and Coordination Failures
  • Abstract: This document analyzes productive development policies in 5 case studies: i) promotion of export services ii) Promotion of export goods iii) promotion of free zones iv) subsidized credit for popular housing, and v) subsidized credit for agriculture. All cases present the history, justification as a function of the externalities to be resolved, public-private coordination processes and results. Click here for more information.

  • The Impact of ICT Cluster Support in the Argentine City of Córdoba
  • Abstract: This paper estimates the direct and indirect effects of support received between 2003 and 2007 by information and communications technology (ICT) producers in the city of Córdoba under the Supply Chain Development in the Province of Córdoba Program. Two complementary approaches were considered for estimating indirect effects: externalities associated with job mobility and externalities associated with geographic proximity. The direct-effect and indirect-effect estimates were calculated using a random effects model in which lagged dependent variables control for selection bias. The model is based on the assumption that companies consider past performance when deciding whether or not to participate in the program. Direct and indirect effects were found to be positive and significant on sales as well as on employment, wages, and exports. Click here for more information.

Contributors

  • Manuel Agosin
  • Biography: a U.S./Chilean citizen, holds a PhD in Economics from Columbia University. He is currently dean and professor at the Faculty of Economics and Business, Universidad de Chile.

  • Marina Bassi
  • Biography: an Argentine citizen, holds a PhD in Economics from the University of California, Los Angeles. She is sector senior specialist in the Vice Presidency of Sectors and Knowledge of the Inter-American Development Bank.

  • Juan Blyde
  • Biography: a Venezuelan citizen, holds a Ph.D. in Economics from the University of Colorado at Boulder. He is a senior economist in the Integration and Trade Sector of the Inter-American Development Bank.

  • Gabriel Casaburi
  • Biography: an Argentine citizen, holds a Masters in International Relations and a PhD in Political Economy from Yale University. He is a lead private sector specialist in the Competitiveness, Technology and Innovation Division of the Inter-American Development Bank.

  • Jorge Cornick
  • Biography: a Costa Rican citizen, holds a Ph.D. in Agricultural Economics from the University of Wisconsin-Madison. He has worked in the Costa Rican public sector on fiscal and regulatory issues, and works as an independent consultant on policy and development issues.

  • Gustavo Crespi
  • Biography: an Argentine/Italian citizen, holds a Masters in Economic Growth and International Trade from the University of Chile and a PhD in Science and Technology Policies from Sussex University, UK. He is a principal specialist in the Competitiveness and Innovation Division of the Institutions for Development Sector at the Inter-American Development Bank.

  • Eduardo Fernández-Arias
  • Biography: an Uruguayan citizen, holds a PhD in Economics and a Masters in Statistics from the University of California at Berkeley. He is principal economist at the Research Department of the Inter-American Development Bank.

  • Alessandro Maffioli
  • Biography: an Italian citizen, holds a Ph.D. in Economics of Production and Development from the University of Insubria, Italy. He is a lead economist at the Office of Strategic Planning and Development Effectiveness of the Inter-American Development Bank and an adjunct assistant professor at the McCourt School of Public Policy of Georgetown University.

  • Fernando de Olloqui
  • Biography: a Mexican citizen, holds Masters degrees in Development Studies from the London School of Economics, United Kingdom, and in International Business Administration from the Mexico Autonomous Institute of Technology. He is a lead financial markets specialist at the Inter-American Development Bank.

  • Ugo Panizza
  • Biography: an Italian citizen, holds a Ph.D. in Economics from Johns Hopkins University. He is a professor of International Economics and Pictet Chair in Finance and Development at the Graduate Institute of International and Development Studies in Geneva, where he is also the head of the Department of Economics.

  • Carlo Pietrobelli
  • Biography: an Italian citizen, holds a PhD in Economics from the University of Oxford, UK. He is a lead economist in the Competitiveness and Innovation Division of the Inter-American Development Bank and a professor of Economics (currently on leave) at the University of Roma Tre, Italy.

  • Alejandro Rasteletti
  • Biography: an Argentine/Italian citizen, holds a PhD in Economics from the University of Maryland. He is a specialist in the Fiscal and Municipal Management Division of the Institutions for Development Sector at the Inter-American Development Bank.

  • Graciana Rucci
  • Biography: an Argentine citizen, holds a PhD in Economics from the University of California, Los Angeles. She is lead specialist at the Labor Markets and Social Security Unit of the Inter-American Development Bank.

  • Ernesto Stein
  • Biography: an Argentine citizen, holds a PhD in Economics from the University of California at Berkeley. He is principal economist at the Research Department of the Inter-American Development Bank.

  • Alberto Trejos
  • Biography: a Costa Rican citizen, holds Masters and PhD degrees in Economics from the University of Pennsylvania. A former minister of foreign trade of Costa Rica, president of CINDE and professor of Economics at INCAE, he is currently president of the board of the Arias Foundation for Peace and Democracy and a senior partner at CEFSA.

  • Sergio Urzúa
  • Biography: a Chilean citizen, holds a PhD in economics from the University of Chicago. He is an assistant professor of Economics at the University of Maryland, NBER research faculty, IZA research fellow and CLAPES-UC international fellow.

  • Christian Volpe Martincus
  • Biography: an Argentine and Italian citizen, holds a Masters in Economics from the University of La Plata and a Ph.D. in Economics from the University of Bonn. He is a lead economist at the Integration and Trade Sector of the Inter-American Development Bank

  • Rodrigo Wagner
  • Biography: a Chilean citizen and economist, holds a PhD from Harvard University. He is assistant professor of International Economics and Finance at University of Chile’s Business School, assistant professor from Tufts University (currently on leave), and an associate member of the Center for International Development at Harvard.

Previous editions of Development in the Americas (DIA):

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