The Latin American and Caribbean region is questioning its economic model. At the spring meetings of the World Bank and the IMF (International Monetary Fund), the message was direct: economic growth is expected to remain mediocre: 1.6% in 2024 and 2-2.5% in the following years , too low to reduce poverty and improve the situation of the population. Governments, quite reasonably, are asking for a second opinion.
This questioning coincides with new ideas that advocate a more active role for the State to end stagnation, sometimes grouped under so-called “industrial policies.” As countries explore and evaluate different solutions, it is essential to keep in mind some key lessons from past experiences, most notably the urgent need to invest more in people and institutions.
Firstly, maintaining the fiscal balance and macroeconomic stability that has cost the region so much is the sine qua non of any growth strategy. No novel plan is exempt from the already accepted laws of fiscal gravity.
Second, standard economic analysis continues to provide a well-understood framework and shared language across the region that facilitates and disciplines policy debate. It underpins the work of new advocates of industrial policy, such as Harvard’s Dani Rodrik and Nobel laureate Joseph Stiglitz, as well as the work of the World Bank and the Inter-American Development Bank (IDB) on productivity policies. It can also justify supporting initiatives such as the Defense Advanced Research Projects Agency (DARPA) or the National Science Foundation (NSF) in the United States, which are exemplified as good practices in the strategy economic mission by Mariana Mazzucato, an approach inspired by the Apollo space program.
Third, new policy experiments must be private sector oriented. State-led activities cannot substitute for the extensive private sector experimentation of new products and technologies that underpin modern dynamic economies. At the same time, companies must be encouraged to increase their productivity, strengthening national competition, ensuring global competition or credibly conditioning state support, for example, on export success, as is the case in Asia.
Fourthly, and perhaps most importantly, the success of any strategy fundamentally depends on the capabilities of people and institutions. Borrowing Mazzucato’s analogy, the success of moonshot Original Apollo depended on improving the quality of “astronauts” (the private sector and supporting institutions) and “mission control” (the State). PhDs in physical sciences and engineering more than tripled in the decade after the U.S. announcement of the mission; The Government promoted technical skills and science and mathematics in school curricula. Asia’s economic miracles have followed this same path.
Latin America and the Caribbean did not do so. The shortfall in skills and knowledge institutions probably explains why dynamic and diversified growth remains elusive, even among established markets and industries. The region has not been able to take advantage of mining, its leading industry for centuries, to turn it into diversified and dynamic economies as they did.
United States or Japan. Similarly, although foreign direct investment and offshoring may have the potential to transform the structure of an economy, this does not happen automatically. Mexico has been producing electronic products for decades. But unlike Asia, no indigenous industrial leaders have emerged.
Latin American astronauts remain on the ground due to their limited capabilities. Only a third of 15-year-olds reach minimum levels in science and mathematics. Worker training programs often do not offer what employers need. The region’s universities do not rank among the top 100 in the world, graduate relatively few engineers and scientists, and are tied with Africa for last place in collaboration with the private sector. Management capabilities lag behind those of advanced countries.
This deficit of entrepreneurs, scientists and trained workers, together with the still pending reforms of infrastructure, finance and regulatory and competition structures, make it difficult to foresee how any growth policy – neoliberal or interventionist – will achieve sustained take-off.
Finally, we must be honest about what “mission control” is capable of doing. The World Bank is committed to strengthening governance. But we must be realistic about the capacity of public sectors to design policies, implement them and resist pressure groups. These qualities are essential for any complex initiative to be successful. The continuing concern for active policies remains that governments lack the omniscience or independence necessary to choose promising sectors or design and execute missions. Hence the preference among many economists for more “horizontal” interventions such as skills or infrastructure, which benefit many sectors.
An equally big risk is that governments see the new generation of industrial policies as a respite from the hard lessons learned over the past 50 years and a shortcut around difficult reforms to build the capabilities and institutions needed.
Therefore, preparing our astronauts and mission control to pilot the growth of the 21st century is the moonshot necessary from Latin America and the Caribbean.
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