Industrial policy as an enabler of productive development

So far, reforms and policies have been proposed to address specific problems such as informality and lack of access to financing. However, many of these problems have common roots that require a comprehensive and coordinated approach capable of articulating these policies. Industrial policy can serve as an articulating mechanism.

Industrial policy is defined as the set of government actions that seek to transform the structure of economic activity in pursuit of some public objective. These policies are targeted, meaning that they are oriented to specific activities, and are intentional in the sense that they seek to change the structure of the economy.

In Latin America and the Caribbean, industrial policy presents an opportunity to boost economic growth and productive diversification. One of the potential benefits is the ability to transform the economic structure toward more advanced and competitive sectors, which could generate quality jobs and foster innovation. However, to maximize these benefits, it is crucial that policies are well designed and based on a rigorous analysis that considers the specific characteristics of each country and the risks inherent in state intervention.

Modern industrial policy moves within a complex triad: the incorporation of new technologies, the promotion of social inclusion and the pursuit of environmental sustainability (ECLAC, 2017). This triple challenge requires a comprehensive approach that not only fosters competitiveness, but also ensures that the benefits of growth are distributed equitably and that economic development is compatible with environmental protection. For example, the promotion of renewable energy industries can generate green jobs, reduce dependence on fossil fuels and contribute to climate change mitigation. However, it is crucial that these policies do not exclude the most vulnerable sectors of the population and that they consider the long-term social and environmental impacts.

Despite its potential benefits, the implementation of industrial policy carries certain risks. One of these is political capture, where particular interests may divert resources to activities that do not benefit society as a whole. Lack of adequate information can lead to inefficient sector selection decisions. Another risk is that poorly designed policies may give disproportionate advantages to certain companies, compromising competition.

To reduce risks, it is essential to implement an approach based on data and empirical evidence. Policies should undergo cost-benefit testing, considering not only direct costs, but also administrative costs. It is important to include continuous monitoring and evaluation mechanisms to adjust policies as needed.

Public-private collaboration is also essential to generate relevant information, formulate action agendas and ensure that policies are effective. In addition, it is crucial to learn from international and, especially, regional experiences, given that the economic and social contexts may be similar. By adopting these strategies, countries in the region can reap the benefits of industrial policy while minimizing its risks.

Now, a well-designed industrial policy must provide a directional framework that allows private actors to make long-term investment decisions, such as the promotion of technologies that make efficient use of resources and produce low carbon emissions. This implies creating an environment that stimulates competition and provides guarantees for corrective action, moving away from rigid and centralized approaches that have failed in the past (ECLAC, 2017).

Industrial policy has a wide range of instruments at its disposal to achieve its productive development objectives. These can be cross-cutting or selective.

Transversal policies, also known as horizontal policies, seek to improve the general productive environment, benefiting all companies regardless of their economic activity or location.

Many of the policies discussed in this chapter are among the cross-cutting ones, such as, for example, those aimed at facilitating access to financing for companies. There are also trade and international market integration policies, human resource education and training, and competition policies. Other interventions include science, technology and innovation policies, as well as investment in infrastructure and the provision of public goods such as education, health and social protection.

Selective policies, on the other hand, focus on specific areas of the economy. On the one hand, there are sectoral policies aimed at identifying and promoting industries with high growth potential, such as renewable energies or biotechnology. To this end, rigorous market analyses are carried out and measures are implemented to promote innovation, public-private collaboration and investment attraction. Territorial policies, on the other hand, seek balanced economic development throughout the territory, reducing regional disparities and boosting competitiveness.

Among the instruments or strategies that can be used by both sectoral and territorial policies is the development of clusters, which, in addition to promoting the development of a specific sector or activity, also boosts local economic growth, employment generation and regional competitiveness.

Finally, the selection and combination of these instruments will depend on the industrial strategies of each country, as well as the characteristics of its productive structure and economic context. Box 2.2 illustrates the case of the digital transformation of the productive sector as an industrial strategy of particular interest to LAC.