Speaking at a recent seminar at IDB headquarters in Washington, D.C., entitled Competitiveness and Consensus Building in Latin America, Porter explained that the success of California’s wine industry isn’t due to favorable climate or good soil quality. Californian wineries thrive because they are surrounded by thousands of specialized companies that support the cultivation, production and marketing of wine by producing everything from bottles and labeling equipment to pesticides and advertising campaigns. This network of suppliers makes it easy for producers to focus on quality and growth. Want to launch a new wine? Specialized marketing firms are ready to help. Need to improve the growing stock? The right laboratories are nearby. Concerned about distribution? A well-integrated network of highways, railways, seaports and airports is close at hand.

Macro and micro. Porter refers to this grouping of industries and services around a specialized product as “clusters.” During his presentation at the IDB Porter explained that these clusters form the basis of strong local microeconomies, and that their proper functioning reflects the extent to which a region or country is able to exploit its human, financial and natural resources.

“The great tragedy of the last decade,” he said, referring to Latin America,“ is to have put all the emphasis on the macro outlook. Competitiveness means more than just the traded sector exports. You need to look at local industries. If local industries are unproductive, they are going to bring down the export industries as well.”

“You can’t explain GDP per capita by looking at the openness of a country’s trade, its education spending or investment levels,” Porter said, “but you can explain it by looking at its microeconomic policies.” He referred to findings published in the 2002 Global Competitiveness Report, which was produced by the Institute for Strategy and Competitiveness. The report shows a strong correlation between GDP per capita and the determinants of productivity at the micro level in countries worldwide.

Good microeconomic policies can foster productivity at the local level by focusing on four areas, according to Porter. These are improving the quality of inputs (such as labor and infrastructure); supporting the environment for investment and local competition; protecting the customer’s right to demand better quality products and services (through consumer protection laws, for example); and fostering industry clusters.

Porter said Costa Rica’s prosperous information technology sector offers a good example of how such microeconomic policies can pay off. The government set out to ensure that this sector could grow without internal or external obstacles. It worked with companies and trade associations, created a favorable legal and regulatory climate for the sector, offered incentives to local universities, and promoted infrastructure policies (such as “open skies” agreements for air transport and low-tax industrial zones) that attracted foreign investment. During the course of two decades, these coordinated initiatives helped breed a cluster of manufacturing, assembly, and software development firms that created thousands of jobs and ultimately attracted large foreign investments by companies such as Intel Corp. and Motorola, Inc.