Getting Industrial Policy Right

DAVOS – At a time of lackluster global economic growth, developing countries are dusting off some old strategies – particularly the use of industrial policy to drive the development of particular sectors and turn them into engines of growth and employment. But the history of such policies, particularly in Latin America and the Caribbean, is filled with failure and cautionary tales.

In the 1950s and 1960s, many Latin American and Caribbean countries embraced industrial policy enthusiastically. By substituting imports with domestic production, relying on government planning to target priority sectors, and implementing selective trade protection (for example, by imposing tariffs, quotas, and import licensing), they attempted to accelerate their transitions from raw-materials suppliers to manufacturing-based economies.

While East Asian countries like South Korea used such policies to enable selected industries to compete on a global scale, Latin American and Caribbean countries rarely got it right. Despite some notable successes, such as the aircraft manufacturer Embraer in Brazil and salmon farming in Chile, governments largely picked losers – not least because political pressure, not firms’ competitive potential, drove the selection process.

In the 1980s and 1990s, Latin America abandoned such policies in favor of a more cautious approach. Rather than backing individual sectors, some countries promoted innovation with across-the-board subsidies and tax breaks, while opening their economies to foreign competition and embracing market-oriented reforms. But these changes, though necessary, were insufficient to deliver growth in productivity and output.