BY LORENA GUARNIZO, 03/05/2016
Around the 1950-60’s Latin American (LA) countries sought the protection of the industry inwards following an import substitution strategy inspired by the ECLAC model. This resulted in a poor industrial development, mainly grounded on natural resource-intensive industries. For long, the situation has been exacerbated due to the political structure of these states. Kohli, A. (2004) classifies most LA countries as fragmented-multiclass states and late-late industrializers. After the Washington Consensus, these countries started following more open market policies. However, their economies still struggle to find ways to become competitive.
The momentum of the world economy has brought to light the enormous competitiveness problem of LA countries, most of which have suffered big downturns in the last year. Although factors as China’s downfall, the oil crisis, and the US recovery, which skyrocketed interest rates, contributed to the high devaluation rates of their currencies, it is especially the underdevelopment of their economies that played a major role. There is now the opportunity to think about different alternatives to prompt growth and enhance industrial development.
Industrial and trade policies are generally seen as opposing forces: while the former attempt to promote domestic businesses, the latter favours the removal of trade barriers. Given this, it becomes difficult for both developed and developing countries to decide between a strategy of integration, where such policies are put together, and one of separation, which might even imply the creation of distinct, autonomous institutions (e.g. the Ministry of Trade and the Ministry of Industry). Evidence from some Asian countries, however, shows that open market policies indeed accelerate economic growth through industrial development. Even Southern American countries, with more conservative and inwards policies, have used trade as a mechanism to thrive (Wade, R., 1990). Therefore, the main issue becomes to find alternatives for LA countries with fragmented political structures that help promoting diversification and resilience in the domestic industry by taking advantage of free trade and reducing its side effects.
This article does not provide final solutions to the underdevelopment problem of these countries. Instead, it aims to open the debate about some initiatives not commonly linked to trade that could be the milestone for fostering industrial progress. From the outset, it is important to address the key terms under discussion.
First, industrial policy is often related to designing strategies to develop manufacturing processes (Weiss, 2011 cited in Stiglitz, J. E., Esteban, J., & Yifu, J. L. 2013b). For this purpose, it will be understood as “any form of selective intervention” including all “policies for economic restructuring (…) in favour of more dynamic activities generally, regardless of whether those are located within industry or manufacturing per se” (Rodrik’s (2004) cited in Stiglitz, J. E. et al., (2013b)). This definition entails functional, selective and market-based policy measures. Furthermore, literature has largely concentrated on measuring the impact of trade on the industry in regards to increasing or decreasing trade flows and how they affect specific industries or sectors. In this article, however, trade will be seen in terms of the improvement of particular institutions, procedures or in general, of the public policies that may boost the industrialization of LA countries in the long-term.
Second, FTAs, especially those of new generation, now include areas that were previously omitted. Trade, therefore, becomes a multidimensional concept with connections to, for instance, phytosanitary and sanitary measures (SPS), government procurement, transparency, services and Foreign Direct Investment (FDI).
All in all, some important transformations are hidden behind the implementation of the above-mentioned provisions, and I argue they should be explored in more detail. Structural changes are not obvious or easily quantifiable; however, there is evidence suggesting that some initiatives pushed by well-designed policies, together with their correct delivery and sustained political support, may be beneficial for pro-active industrial development. As claimed by Barber, M., (2015) the target ought to be to achieve the “irreversibility” in the implementation of those policies. In this order some of the initiatives include, but are not restricted to:
Transparency. FTAs’ provisions essentially consist of publishing all possible relevant information for citizens in public Web Sites; thus, everybody has easy access to all local procedures and regulations no matter where they are located. This obligation undermines traditional corruptive practices, which commonly feed off the process of limiting information to specific groups of people. The biggest change may be more apparent in Government Procurement, given the new organizations or procedures established to veil for transparent Public Tender Bids and foster the participation of new actors in local projects formerly drawn only by certain monopolies.
Capacity-Building. For Ramdoo, I., (2015), capacity-building consists in the aggregation of particular skills, technological know-how and the accessibility to “complementary inputs, technology, cost-effective logistics, quality infrastructure, and functioning and well-governed institutions”. These are mostly fostered by the private sector and can be found in FTAs as provisions that incentivise the transmission of capabilities from the ones who own the knowledge to the ones who need to learn; e.g. through the Tariff Rate Quotas (TRQs), or Foreign Direct Investment (FDI).
Under the Central America FTA (CAFTA) – the Dominican Republic (DR), or CO-US FTA, these TRQs laid down the creation of a company in one of the countries Party of the agreement. This company is formed by each of the representative sectors of all Parties. It is responsible for the quotas’ auctions, thus it gains a fee. All the money collected from these operations must be divided between the associations of each country with the aim of doing research, market promotion and export programmes for the industries in their sectors. These associations must also provide capacity building among their constituents in order to prepare them for the total elimination of tariffs. On the other hand, FDI is a good mechanism to transfer specialised skills and technology that do not exist in the country.
Strengthening institutional capacity. With the entry into force of FTAs and the immersion of these countries in international frameworks, institutional reforms are necessary. First, some governmental agencies require the creation of new offices to manage the relationships with foreign governmental agencies, which enhances their institutional presence. Second, some agencies have to strengthen and enlarge specific areas to counteract the adverse side effects of trade. One of the most common is the Origin Verification Department in charge of avoiding unfair trade practices. Third, some governmental agencies modify their internal procedures for the benefit of their customers. For instance, FTAs’ provisions, normally decrease time, verification and approval processes for imports and exports. Fourth, strengthening work regulations for employees to protect them from labour abuses, mainly held by the ILO.
Environmental policies. A study carried out in South and Southeast Asia by Hettige, H., Huq, M., Pargal, S., & Wheeler, D. (1996) determined that “pollution intensity is negatively associated with scale, productive efficiency, and the use of new process technology but it is strongly and positively associated with public ownership.” Moreover, it revealed that informal regulation and public pressure are critical drivers in avoiding the environmental damage.
FTAs are powerful tools to give voice to people to denounce environmental damage caused by Multinational Enterprises (MNEs). Though the provisions are primarily focused on bilateral cooperation and joint work among parties, these push the creation of mechanisms for citizens to pass information directly to the Government with the aim of holding accountable those who pollute the environment.
Education. The UNIDO Report (2007) notes that those developing countries that managed to industrialise first relied on primary resources extraction or low-cost labour force but later changed to human capital investments or technological modernisation. Korea, Taiwan, or India, are good examples of places where the industrial development and the economic growth were driven primarily by human capital development.
Drawing from those findings, this article argues that the education policy may be promoted by trade from two different angles. First, supported by FDI, transmitting capabilities to people through training, so they acquire useful skills for specific sectors. Second, investing in research and development (R&D), as well as technology in order to embed more advanced technologies, and cumulate technological capabilities and knowledge.
Manufacturing, which constitutes the traditional view of the industry. Countries such as Mexico and to a lesser extent Brazil have used trade to become world suppliers of labour-intensive goods and to enter into Global Value Chains (GVCs) (UNIDO, 2002). According to the WTO, countries prefer to commercialise with those partners they have already established clear rules and a stable relationship. This is grasped through multilateral agreements, but ideally via FTAs.
The Economist once recalled, “The hard work of structural reforms is the only way to boost growth and welfare”. Indeed, the listed initiatives must be part of a group of reforms launched directly by governments. They require continued work and inflict a heavy political price that multi-class states, as the ones studied here, are not willing to pay. Yet, in compliance with the FTAs’ provisions, LA governments have been forced to put in place some of the reforms. Furthermore, citizens have been increasingly encouraged to be more involved in the co-production of public policies.
The effect of the changes is however still unclear. Countries with a long record of engagement with free trade schemes have achieved better results in the industrialization process (e.g. Mexico). Even so, LA has a long way to go. The recommendation is to strengthen and have more control in the implementation of those reforms and to put a stronger accent on the aspects of trade that can promote industrial activity.
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