Theory and practice of industrial policy: evidence from the Latin American experience

The literature on the economics of the public sector (and the role of the State in the economy) concentrates on how the government affects the performance of economic sectors, what activities and services should be managed by the State and which by the private sector, and what schemes of incentives the State can use to influence the decisions of private economic agents. However, manuals covering this area generally focus on macroeconomic policy and on policies that affect issues such as education, health and pension systems, and do not, generally, deal directly with industrial policy. Industrial policy has always been controversial in the economic literature, as in political debates. Not only is it ignored in the majority of the courses on the economics of the public sector, but the very term industrial policy" is absent from the New Palgrave Dictionary of Economics, unlike terms and concepts such as monetary and fiscal policy (Chang, 1994).To the extent that the economic literature has addressed industrial policy, it has focused on the policy practices and experiences of particular countries at given times. The theoretical side of the discussion about industrial policy has focused on its rationale and on justifications for State intervention in the economy —i.e., on the question "What do we need industrial policy for" rather than on a normative analysis of which policies, based on national development objectives, are appropriate in individual cases. Basically, there are two different stances: (i) the neoliberal position, which places trusts in the market's adjustment mechanisms, leaving minimal leeway for the State to act to correct market failures; and (ii) an approach that synthesizes Schumpeterian, evolutionist and structuralist (traditionally promoted by ECLAC), views —which in this article will be referred to as the SES synthesis—, in which there is a room for private and public intervention in industrial development.With the term SES synthesis we encompass the positions of a diverse group of economists and thinkers on development whose common denominator is their recognition of: (i) the intrinsic, qualitative and quantitative differences between sectors and among productive activities; (ii) the specificities of knowledge and technology, and their catalyzing role in development processes; (iii) the absence of automatic adjustment mechanisms, and (iv) the role of institutions in shaping the transition to higher levels of development associated with the transfer of human and financial resources to activities with increasing returns. From this perspective, structural change (i.e., the transformation of productive and organizational structures) implies costs and faces barriers that must be overcome through ad hoc State intervention, and involves the creation of asymmetries to favor activities considered "positive" for long-term growth, generally technology and knowledgeintensive activities2. In this approach, the State can be a promoter of development, which might be, according to the particular context, directly involved in production, financing it through tax credits and subsidies. At the same time, it can be the articulator of policy measures tailored to promote linkages between agents.Notwithstanding common belief, industrial policy always played, and still plays, a role in public policy decisions, and influences the behavior of agents and, hence, the dynamics of the "real economy", even when it is not explicitly recognized as "industrial policy". As the definition of "industrial policy" by Evan Jones in the Encyclopedia of Political Economy (O'Hara, 1999) indicates, "governments will have an industrial policy regardless of libertarian beliefs or arguments." Jones illustrates this with the case of post-World War II Germany, when the Ministry of Finance, clearly in a spirit of economic liberalism, implemented selective sectoral policies based on economic development priorities, although it had no formal industrial policy (Shonfield, 1965).In this context, the present article attempts to define the concept of industrial policy, to review certain relevant historical experiences, and to examine the current state of the art of industrial policy in Latin America. Following the present introduction, a first section presents some introductory notes regarding the importance of manufacturing in the development process as addressed by the literature, as the necessary premise for the discourse on industrial policy. The second section defines the concept of industrial policy and its scope, as well as the institutional framework involved and its domains of implementation. The third section discusses industrial policy's raison d'être, concentrating on two major positions. One is based on the idea of correcting market failures, while the other is the SES synthesis. The fourth section provides an overview of the principal features of industrial policy at various historical times and places (in England, Germany, Japan, United States and the Republic of Korea). The fifth section focuses on industrial policy in Latin America, presenting a balance of progresses and obstacles, and examining measures to overcome implementation problems, while the sixth section concludes."