Industrialization in Latin America: exile and return
14 September 2020 Manuel Albaladejo, UNIDO representative in Uruguay and Director of the UNIDO Regional Office covering Argentina, Chile, Paraguay and Uruguay.
By Manuel Albaladejo, UNIDO representative in Uruguay and Director of the UNIDO Regional Office covering Argentina, Chile, Paraguay and Uruguay.
First published as Industrialización en América Latina: destierro y retorno, on 8 September 2020 in Argentina's El Economista newspaper. Translated from Spanish by Emma Manos.
My participation in an industry webinar on 3 September, took me back 20 years in time to when I was part of a group of economists at the Universities of Sussex and Oxford advocating for the role of industrialization and industrial policy. These were years when it seemed as though we were swimming against the current: industrial policy was taboo. It was linked to over-regulation, the inefficiency of the state apparatus, abusive interventionism, and backward policies. Market forces were the holy grail, and the best industrial policy was no industrial policy.
But how to explain the interventionism and industrial policies that forged the Asian development miracle of Singapore, Hong Kong, South Korea and Taiwan between the 60s and the 90s? And if these were isolated cases, how was it possible that another handful of Southeast Asian countries, like Malaysia, Thailand, Indonesia and Viet Nam, managed to develop using similar recipes years later?
The problem did not seem to be industrialization and industrial policy per se, but the specificities of policy instruments, governments´ capacity for management, monitoring and evaluation, and of course, their adaptability through mechanisms of learning and adjustment. But, for many, the ‘how’ had already killed the ‘what’.
Sanjaya Lall, my professor and mentor at Oxford University, argued 20 years ago that "industrialization remains the engine of development, structural change and modernization". A few years later, acclaimed Cambridge University economist Ha Joon Chang noted in his book, Bad Samaritans, that "history has repeatedly shown that the most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher and growth is faster than in agriculture and services”. But these academic discourses did not permeate the policymakers´ agenda, much less the Bretton Woods system.
By the 2010s, the discourse had taken a radical turn. Funnily, this change was prompted by those same countries that had disowned industrial policy in the past. In his State of the Union Address on 12 February 2013 - after bailing out the automotive sector - President Barack Obama made it clear that the United States' priority was “making America a magnet for new jobs and manufacturing”. Four years later, at Boeing’s South Carolina plant, President Donald Trump agreed with his predecessor and stated that, “we want products made by our workers in our factories stamped with those four magnificent words - Made in the USA.” Never in the history of the United States have two administrations with such antagonistic views coincided so clearly on their vision of America´s future economic growth engine: re-industrialize, produce in America, and bring American companies back home to generate wealth and employment in the country.
At the same time, the sceptical press was also weighing in. In February 2012, the well-known CNN journalist and Washington Post columnist, Fareed Zakaria wrote in Time magazine: “I am deeply sceptical of government industrial policy (...) And yet, when I look at China and South Korea and also Germany and Japan, I see governments playing a crucial role (…). That’s what industrial policy looks like these days. The theory does not make sense, but it is hard to argue with its result.”
A major endorsement came in 2019, when two senior economists at the International Monetary Fund (IMF) wrote The Return of the Policy That Shall Not be Named: Principles of Industrial Policy, and argued that “the success of the Asian Miracles with industrial policy stands as an uncomfortable story that many ignore or claim (it) cannot be replicated”. They go on to suggest three industrial policy principles behind the Asian success: a) support for domestic producers, b) export orientation, and c) the pursuit of fierce competition.
How times have changed - from ostracism to becoming “mainstream". Industrialization and industrial policy are now discussed openly in academic and political circles. Market failures, the evidence in successful countries, the inequality generated by the current economic model, and the imperative need to create sources of wealth and employment, have made many governments rethink industrialization as a key driver of growth. Very few people associate industry with pernicious, outdated images of factories spewing black smoke into the atmosphere. The fact is that the new industrialization paradigm, which is linked to the Fourth Industrial Revolution, has changed the public perception of the sector. Now industry is associated with 3D-printing, robotics, artificial intelligence, the Internet of Things, augmented reality, Big Data and integration systems. Industrialization continues to be a key element for diversification and increased productivity through technological development and the advancement of highly qualified human resources (particularly stemming from science, technology, engineering and manufacturing subjects).
Where was Latin America in all this? The region was a passive observer of the change in discourse. The siren call of a renewed interest in industrialization could be heard, yet the region's path had already been paved. For years, a large number of countries had been taking the neo-liberal pill, leaving the allocation of resources to market forces, minimizing the role of the state and consolidating the extractive economic model as the main source of wealth. The result? A rapid deindustrialization of more than 20 years that has left the region´s industrial sector at a historically low capacity. Now, the pandemic could be the final nail in the coffin. Or could it generate the opposite effect?
The disruption of global value chains that we have seen in Latin America has been largely to do with the region’s dependence on imported manufactured goods. But the industrial sector has shown resilience during the pandemic in some strategic areas, despite the shortages of essential imported products. In recent months, we have seen a revival of the chemical industry, of paper manufacturing, of the pharmaceutical industry and of food production. The question is obvious: why should the revival of production in Latin America be the result of an external shock? Why not act ex ante and strengthen productive capacities in strategic sectors to be more resilient and, at the same time, more competitive?
The pandemic offers an excellent opportunity for Latin America to reverse the trend and to bet on reindustrialization. I believe there are few excuses left not to do so. Even for those who rejected industrial policy and industrialization in the past, no arguments against it still stand. The current evidence and situation demand action. We can discuss the means, but if we agree with the goal and manage to finally establish the inclusive and sustainable industrialization agenda in Latin America, then we will have gained something positive from these last months of disruption, uncertainty and pain.