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«Juan Carlos Moreno-Brid This article explores the need for Mexican policymakers to add an active industrial policy as a key instrument to assist in ...»

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This tendency is a matter of concern because it implies that it is likely that if and when the economy enters a phase of fast growth, it runs the risk that the trade deficit in manufacturing will soar excessively as a percentage of its GDP. Experience has shown that when this occurs in Mexico, unsustainable pressure tends to build up on the balance of payments and that if this problem is not corrected, sooner or later it derails the overall growth process.

Another concern regarding the performance of Mexico’s manufacturing sector is the evolution of its productivity (see Hallberg, Tan, & Koryukin, 2000;

Kuznetsov & Carl, 2008; López-Córdova, 2002; World Bank, 2000). Its labor productivity has been lagging behind that of the U.S. manufacturing industry. In contrast to Mexico’s experience during the import substitution era, its gains in labor productivity in recent years have been associated with a reduction in employment in relative and in absolute terms. For a number of years the Mexican manufacturing industry has ceased to absorb surplus labor from the rural and services sectors. Its incapacity to create enough jobs is translated into an expansion of the informal sector, marked by low productivity, low wages, and virtually no social protection (see CONEVAL, 2013; Cordera, 2012; Samaniego, 2008).

The empirical evidence indicates that building a robust, internationally competitive manufacturing sector capable of generating trade surpluses and creating jobs is virtually an indispensable condition for large-sized developing economies to enter a path of high and persistent growth. Mexico is not an exception. Its development agenda must include policies explicitly tailored to improve its manufacturing industry’s competitiveness in the domestic and world markets, based on knowledge and innovation-intense activities and significant backward and forward linkages to domestic suppliers.

These points highlight the urgent need to implement policies that lead to a transformation of Mexico’s manufacturing industry so that it: (1) continues a dynamic penetration of export markets in America and, most important, in Asia and China, based more and more on knowledge intensive activities and not on low wages; (2) builds more and stronger links to domestic suppliers to augment its local content and strengthen its capacity to pull the rest of the economy into a trajectory of high and robust expansion; and (3) contributes to expand the internal market by satisfactorily meeting the changing demand of domestic consumers and improving employment conditions. This last goal became dramatically important in the aftermath of the 2008–2009 financial crisis and the slowdown that it provoked in world trade. Such weakening of global trade does put in question the viability of export-led growth strategies in medium-sized and large economies and compels them to rely more on the expansion of domestic demand.

The insufficient dynamism of the Mexican economy over the last three decades is blatantly reflected in the evolution of Mexico’s real GDP per capita relative to that of the United States, its close partner in trade and foreign direct investment (FDI). Figure 4 shows that the gap has widened since 1982.

In 1982, Mexico’s GDP per capita was 23.3% of that of the United States. By 1995, the figure was 16.1%, and today it stands at 16.9% (INEGI, 2013). This gap is similar to the one prevailing in the 1950s, nearly 70 years ago. Brazil has 226 Latin American Policy

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Figure 4. Real GDP per Capita in Selected Countries Relative to the United States (Percentages, from Data in Constant U.

S. Dollars of 2000) Source. Own calculations based on data from World Development Indicators, World Bank (2012).

followed a similarly disappointing long-term growth path, and the gap in its GDP per capita is wider today than 30 years ago. Costa Rica has fared slightly better. Uruguay and Panama show progress in this aspect, thanks to their fast economic expansion over the last 10 years. Acute contrasts are the trajectories of Chile and China, having systematically reduced the difference in their GDP per capita as compared with the United States. Compared with these economies, Mexico’s quest to catch up with the United States seems even more disappointing. The reforms have not succeeded in putting the Mexican economy on a high growth export-led path (see Hanson, 2010; Kehoe & Ruhl, 2011;

Moreno-Brid & Ros, 2009). Low inflation and small fiscal deficits have become a normal characteristic of the Mexican economy, and its exports of manufactures have boomed, but over the last 30 years the average rate of growth of GDP in Mexico has remained very low. Such little dynamism of its growth trajectory keeps it from narrowing down its income gap with the United States and, even more relevant, has made it more difficult to achieve a faster and more significant reduction of poverty and inequality and a more robust creation of formal jobs.

Industrial Policy: Theory and Practice Industrial policy has historically provoked visceral reactions among those who support it and those who are against it in Latin America. Just a few decades ago it was virtually banned from the official economic policy discourse, but such animadversion, or strong skepticism, did not stop governments in the region and elsewhere—including in wealthy nations—from continuing to apply industrial policy interventions at local and even federal levels. Today the perception of industrial policy as a curiosity reminiscent of populist regimes could not be more erroneous. In the aftermath of the international financial crisis of 2008–2009 it has a generalized acceptance in the academic and political discourse as well as with policy practitioners. There is still debate of its merits, limitations, challenges, and different practice in a wide number of countries. The European Union, the Industrial Policy in Mexico 227 United States, the United Kingdom, and other economic powers have launched ambitious programs and policy initiatives to boost their manufacturing sectors.

For example, the United Kingdom’s Prime Minister, David Cameron, gave a speech last year to high-level staff of the Foreign Office.

We need a more strategic, modern approach to maintain and develop our global comparative advantage and get out there and make the most of it. We need what I call a modern industrial strategy. Not keeping dead industries on life support like the industrial strategy of the 1970s but supporting industries where we have a competitive edge and encouraging the high growth industries of the future. At the heart of a successful modern industrial strategy is the convening power of national government to get behind what works and to position our key sectors so they have the best chance of winning in the global race (The Telegraph, 2012).

At that time, the Japanese government also vowed to put important programs and policies in place to foster manufacturing in partnership with the private sector as a reaction to “increasingly aggressive industrial policies of America, Britain, China, France” (The Economist, 2010).

Numerous factors explain the generalized open return of industrial policy in the developed world. First, by serving as a tool to protect jobs and to stimulate domestic demand, it helps to reduce the adverse effects of the financial crisis.

Another factor that contributes to shift public opinion in favor of industrial policy is the push for cleaner technologies for production and more efficient energy use to compete in the green economy. In addition, the dynamic growth trajectories and penetration of world markets by China, India, and other Southeast Asian nations, where industrial policy has unabashedly been part of the government’s economic strategies, have also led to reassess the merits of industrial policy. As a recent review concluded, “The truth is that everyone uses industrial policy—some more successfully and some more openly than others” (Ciuriak & Curtis, 2013).

Before listing its main pros and cons, some clarifications are necessary concerning industrial policy’s objectives and its relation to economic growth. By industrial policy we understand the use of government policies specifically targeted to change the productive structure of the economy to further some activities more than others. Another crucial point is that the objective of industrial policy is to promote growth and development in the economy at large and not exclusively in the manufacturing sector or in any individual, specific activity (see Calderón & Sánchez, 2012; Cimoli, Holland, Porcile, Primi, & Vergara, 2009;

ECLAC, 2012).

Industrial policy interventions are based on two assumptions. The first is that the market by itself will not bring about the transformation in the economy’s productive structure in the direction, magnitude, or speed desired by policymakers. The second presumption is that the rate of growth of an economy is associated to an important extent with the composition of its output and of its exports. What an economy produces and what it exports are among the key determinants of its long-term growth trajectory (see Capdevielle, 2005; Cimoli et al., 2009; Hausmann et al., 2005). Economies that have a highly diversified export structure tend to grow faster and in a more stable way than those whose exports are heavily concentrated in few products and commodities.

There are other characteristics of an economy’s productive structure that exert a fundamental influence on its rate of growth. As ECLAC has pointed out, an 228 Latin American Policy economy’s productive structure is more conducive to ensure high and sustained growth to the extent that it has these three characteristics: (1) its output and exports are oriented and able to compete in the dynamic segments of global value chains in world markets; (2) its output has an important and increasingly significant presence of activities whose production processes are intensive in innovation and high technology; and (3) its productive structure is marked by a significant degree of interconnectivity, of forward and backward linkages. Economies whose productive structure is marked by these characteristics are more likely to be able to build up dynamic competitive advantages that allow them to enter into virtuous circles of expansion of output, productivity, and net exports, with important and positive effects on real wages and employment (see ECLAC, 2012).

Paying attention to these aspects in the design, implementation, and follow-up of industrial policy is important, but it does not guarantee that it will successfully induce a structural transformation in the economy to boost the long-term rate of expansion of output and productivity, a transformation that market forces acting on their own will not achieve. There are many other factors that condition the effect of industrial policy on economic growth, among them the institutional framework for its application, the reaction of private investment to policy incentives, access to financial resources, the conduction of macroeconomic policy, and the incidence of external shocks in the terms of trade or in key world markets.

The historical and sociopolitical context is important. Ignoring the structural characteristics of an economy in the design of its industrial policy is a recipe for complications, and perhaps irrelevance in its actual implementation.

In small economies, given the limited scale of their domestic market, industrial policy should focus on the promotion of services. In large economies, it traditionally puts emphasis on fostering manufacturing. Given that manufacturing is subject to increasing returns to scale, the transfer of resources to it from agriculture and services tends to increase productivity and growth in the whole economy.

These comments have presented our views on key aspects of industrial policy and how certain characteristics of an economy’s productive structure exert a significant influence on its rate of growth. In the following section we briefly examine some basic myths and challenges of industrial policy.

Myths and Challenges of Industrial Policy: A Basic Guide The first myth is that the best industrial policy is no industrial policy. As a slogan, it gained some notoriety in the early 1990s in Mexico. It reflected the then-dominant view that industrial policy should be avoided or eliminated given that it was essentially a source of distortions and inefficiencies in the allocation of resources.

As a general claim on the benefits and costs of industrial policy, and for that matter on government direct intervention in the economy, this sound bite had an ideological root more than a sound analytical or historical basis. At the time of that slogan’s appearance in the early 1990s, even Mexico was applying an industrial policy, although with marked differences from the one that previous administrations had applied. The macroeconomic reforms initiated in the mid-1980s Industrial Policy in Mexico 229 canceled a number of policy initiatives, but some very important programs to foster exports prevailed among them. The in-bond (maquiladora) decree was initially put in place to promote scarcely qualified labor-intensive exports in plants close to the U.S. border.

A few, yet significant, programs and policies remained, actively oriented to buildup or consolidate Mexico’s big exporters. To meet this goal, industrial policy facilitated the imports of intermediate inputs and raw materials to be reexported.

Exports of manufactures especially but not exclusively from in-bond maquiladoras boomed, but with little local content. The administrations of Presidents Zedillo, Fox, and Calderón did not cancel this program. Openly or not, these administrations continued to implement policy initiatives and programs to strengthen selected industrial activities, some of them in manufacturing.

On the theoretical side, it is standard knowledge that market imperfections and failures—including the absence of certain markets—justify industrial policy in the sense of direct policy interventions by the government in the allocation of resources to favor some industries or productive activities. Mainstream economics identifies four theoretical arguments that sustain the legitimacy of industrial policy, positive externalities, strategic trade policy, infant industries, and coordination failures.7 To these we could also add that in some cases it is the absence of markets that justifies such government policies.

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