Egg or chicken?
National accounts are eloquent in showing that the share of industry in the GDP has been declining in almost all countries with a previously reasonable level of industrial activity. Statistics also show that the share of services in the GDP has grown to become the main economic activity. That said, it is tempting to infer that services would have replaced industry in consumer baskets.
Although a somewhat hasty conclusion, it is at least partially correct, for we are now consuming a greater deal of services. Industrial goods, however, remain relevant in people’s lives. Think of vaccines and medical and hospital equipment, for example, in these times of pandemic. But if industry is still so relevant, why then is the sector losing share in the GDP? There are many explanations to the fact, but two of the most important are the change in the way industrial goods are produced and their composition.
In order to reduce costs, increase productivity and competition, gain efficiency and agility, and be able to concentrate on what would be the “core” of the activity, industrial managers have fragmented production and incorporated methods such as lean manufacturing and others that would eventually lead to or strengthen the formation of global value chains. Just as shop floor activities, such as logistics and R&D were “subcontracted”, which would lead to “outsourcing” certain stages of industrial activity. As concepts such as shop floor and manufacturing are redefined in this scenario, services would acquire a leading role.
Service availability would, then, become one of the determining elements of the profile and geography of industrial investments. In fact, sophisticated and diversified productive service ecosystems and open and innovative markets would become a critical factor of industrial competitive advantages. Beyond that, services would become a kind of “infrastructure” upon which modern industrial activity would be built. Combined with the growing use of productive technologies, such as robots, artificial intelligence, and the Internet of Things, the availability of such infrastructure would help explain the recent wave of industrial relocation, in which businesses are leaving countries with low labor costs towards regions with advanced and sophisticated services, such as the United States.
In this sense, where does Latin America stand? Industry participation in the region is modest and has been further shrinking. But since industry is and will continue to be a fundamental activity for the generation of income and formal urban employment, productive sophistication and diversification, as well placement in international markets, it would be reasonable to expect that the industrial agenda should be present in national economic growth strategies.
What type of industry does Latin America want to have, however? The region could explore many of the new industrial investment opportunities available, among them, the industrialization of comparative advantages. Consider the broad agenda of industrial businesses whose starting points are commodities and biodiversity. It ranges from elaborate and processed foods, chemical and pharmaceutical industries to products and new materials developed from the region’s minerals, corresponding equipment and technologies, to name a few among so many other opportunities. Industrial activities associated with the climate change agenda could also be a hotbed of new investments and technologies. Achieving such full potential, however, will require the right conditions to attract and retain industrial investment.
Although the contribution of the services sector to the region’s GDP is relatively high, at 64%, most of those services are destined for final consumption, while productive services are, in general, costly and of low quality. But modern services are nothing new here – think of Colombia’s world-class coffee industry and its brands and distribution networks, or Brazil’s aerospace industry, to name two examples that have been decisively supported by highly sophisticated services. The challenge for the region would not be, therefore, to start a new journey, but to scale up and provide access to modern productive services.
What could be done? At this point, considering both the international environment and our local constraints, the region must move strategically and efficiently if it means to expand its industry and have a voice. To this end, it would help to know which comes first: industry or services. In other words, does critical industrial mass attract productive service investments, or is it critical service mass that attracts industrial investments? This goes back to the chicken and egg story.
There is no uncontroversial answer, but China’s recent experience is inspiring. The country initially boosted the development of basic and labor-intensive manufacturing. As it created critical mass, the industry sought to advance to subsequent stages of the value chains, but ran into distinct limitations of modern productive services. Eventually, public policies would encourage the attraction and local development of services, which would be decisive for the industry to reach the current stage of competition and sophistication.
Our reality is different from that of the United States and China. We will need to combine simultaneous industrial and service development policies in order to create synergies, attract investments and enable business in potential segments. International experiences may provide us with inspiration, but we must to learn for ourselves and develop our own paths if we are to participate in the 21st century industry.
