Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
The industrial policy debate changed rapidly, both in direction and in intensity. The topic, that has been seen with suspicion by many due to its supposed interventionism in the markets, has entered the economic policy agenda of developed countries, including the United States and the European Union. The reasons behind this change include geopolitics, the search for independence and productive autonomy, job and income generation, and even inflation control.
In the United States, the Obama administration published documents on the benefits of an active industrial policy in a context of increasing strategic complexity and market concentration, and the need to protect jobs. Under the Trump administration, the White House implemented trade and investment policies to protect the industry from the perspective of the WTO and introduced the "reshoring" policy that promotes the return of US factories based in China. The Biden government combined both strategies to shape an even broader and more ambitious industrial policy.
The European Commission, for its part, discussed industrial policy documents for years. More recently, it began to implement those policies justifying, among others, the defense of strategic interests and the need to promote the digital economy, the energy transition, and the sustainability agenda. In both cases, the policy is anchored in significant budgetary resources.
In this context, the promotion of free trade and global value chains leaves the scene, and the promotion of local value chains enters. It is a sea change with many implications. But even more disruptive is the growing trend towards the fragmentation of international standards and norms, including in finance, production systems, the digital economy, and services, with potentially profound impacts on markets.
And how does Latin America and the Caribbean (LAC) fit into this changing agenda? The region has benefited from globalization and free trade that have reigned in recent decades. After all, the general population began to consume technologies, electronics, textiles, and various industrial goods at affordable prices, with measurable benefits in terms of well-being and even poverty reduction. In order not to go too far, let's think about the popularization of cell phones in the region. Protectionism, subsidies, the weakening of the institutions of world trade and the fragmentation of standards do not serve, therefore, the interests of the region.
What to do? At this point, it seems unrealistic to expect free trade to reemerge in the foreseeable future, and it seems more reasonable to expect that we will live in an environment of more market intervention. In this context, the region must take measures to protect its interests, which could include the promotion of its industry. But what industrial policy should the region promote?
From the outset, it must be recognized that the region presents a diversity of situations. There are countries that industrialized and deindustrialized, like Brazil; there are others who started an industrialization that soon lost strength; and there are others that practically never entered a cycle of industrial development. Finally, there are countries that have made progress in the industrial sector, but within a very specific framework, such as participation in the trade agreement between the United States, Mexico, and Canada.
Unlike advanced countries, whose motivations for promoting industrial policies respond mainly to geopolitical issues, in LAC the motivations are based mainly on the social agenda and the need to change the pattern of insertion in global trade.
In a context where industrial activity increasingly uses science, technology, innovation, talent and new business models, and where markets are increasingly concentrated, it seems unreasonable to expect conventional industrial policies to be effective. Therefore, it will be necessary to apply an industrial policy with a pragmatic approach, visualize alternatives and focus on adding value, using advanced technologies and increasing productivity and competitiveness in such a way that it brings the region closer to the global economy. That being said, what are the opportunities for the region?
The region must promote businesses with market niches appropriate to the conditions of our countries. At least two lines of action could be considered. The first would be made up of companies in which the region already has a comparative advantage and already has the knowledge, talent, experience, regulation and appropriate institutions for those activities. Activities with these characteristics include agriculture, animal protein, mining, oil and gas, forestry, and biodiversity. Value addition would come from food processing and distribution, mineral processing and enrichment, the oil and gas industry, medicines, and cosmetics, among many others. It is, therefore, the diversification within value chains in which we already participate.
A second line of action is associated with powershoring, as we have discussed in this space, exploiting the region's unique capabilities to provide green, safe, cheap and abundant energy and the immense development potential of the carbon market. These are opportunities to attract industrial foreign direct investment, especially from countries that are under geopolitical pressures, costs and the environmental compliance agenda, factors that have threatened the competitiveness and even the survival of several companies.
Both pathways are anchored in realistic foundations, are powerful and highly promising, can generate a lot of formal employment, add value to the existing industrial park, help boosting local and regional value chains, and can make a decisive contribution to modernizing the region's economy. For this, it will be necessary to implement, in coordination with the private sector, specific policies and measures that reduce the risk perception and promote predictability, identify and address the weak links in the value chains and focus on adequate and sustainable microeconomic incentives.
Unlike other industrial policies, those ones are virtuous, since they are not necessarily conditioned by protectionism or subsidies, they generate results of global interest and share opportunities with foreign investors. In other words, they are policies that stand before the region and the world.
