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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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Local positive externalities are present when the supply or availability of certain goods and services generates benefits for society as a whole that go beyond the benefits for the firm that produces them. In these cases, the market alone will not ensure the socially adequate supply of such goods and services. For example, a firm that tries to innovate bears exclusively the costs of innovation in many fields, but the knowledge benefits may be easily accruable to its actual and future competitors; without direct government intervention, the “supply” of innovation will be lower than what its social benefit would imply. Private marginal net benefit is much lower than the social marginal one.

Strategic trade and industrial policies are relevant in industries with increasing returns to scale to gain bigger shares of the market and larger scale of production to improve competitiveness by reducing average production costs. In such industries, direct support by the government is justified on two grounds. Firms gain great benefits from being among the first entrants into new markets, and they enjoy the expansion in the scale of their production. Furthermore, because other countries apply industrial policy to promote the international competiveness of their firms, it is in the best interest to act in similar ways and implement this type of industrial policies.

The infant—or nascent—industry argument for state intervention is based on the notion that advances in productivity are far from linear but actually have a cumulative quasi exponential gain in the process of “learning-by-doing.” The argument is that unless the government intervenes to foster them temporarily, firms in the nascent phases of such industries would be unable to reach more mature stages in which their productivity would have fully exploited the benefits of learning-by-doing. In Mexico today, as in many other countries in Latin America, the infant industry argument does not have much spin as policymakers tend to associate it with the failed experiences of previous decades and the import substitution regime. There have been many failures in the application of 230 Latin American Policy industrial policy, but as Rodrik (2008) concludes, “It is rather difficult to identify instances of non-traditional export successes in Latin America and Asia that did not involve government support at some stage.” Lin (2010), the World Bank’s chief economist in 2012, noted, “Developing economies are ridden with market failures, which can not be ignored simply because we fear government failures. And as economic historians have demonstrated, many of today’s developed nations owe a substantial amount of their progress to the systematic application of industrial policies to protect their domestic manufacturing under the infant industry rationale.”8 Coordination failures imply the inability of the market to ensure the simultaneous action of private firms in situations where it would not be profitable for them to act in isolation, for example in investing, but it would be enormously profitable to invest in a coordinated fashion. An example is found in many poor countries where piecemeal investment by individual private firms acting on their own is not profitable enough, and their individual added on outcomes would be insufficient to push the economy away from the trap of slow growth equilibrium, unless the government coordinated it to ensure the benefits of economies of scale and to break certain oligopolistic markets.

A second myth is that industrial policy should be restricted to the application of so-called horizontal policies; it should not consider initiatives that discriminate explicitly and are directly aimed at fostering some industries instead of other activities. A key problem with this idea is that, except for very basic policy initiatives such as red tape removal, virtually all so-called horizontal policies do not exert the same influence on the various firms and industries. Policies aimed at giving support to innovation differently and most favorably affect firms that participate in high-tech, knowledge-based industries over firms whose production processes are intensive in low wages and have a poorly qualified workforce.

The same is true for another typically horizontal initiative, the accelerated depreciation of capital investment for tax purposes. Its effects on private firms are far from uniform as the firms are dependent on their capital labor ratios. Other horizontal policies such as exchange rate depreciations or customs facilitations also have heterogeneous effects on different firms according to whether they produce tradable or nontradable goods and services.

An additional myth regarding industrial policy is that it should not be used because vested interests will capture it, resulting in corruption and rent-seeking behavior. One could raise the sane caveat to social policies, especially in electoral times, but we seldom hear that governments should refrain from applying social policies and programs. Vested interests can capture any policy, but the solution lies not in abstaining from them but in putting in place monitoring and accounting mechanisms to accompany their efficient and honest applications. It is important that the incentives considered by industrial policies are temporary, transparent, and systematically evaluated according to measurable performance criteria a priori defined.





Another criticism, or myth, is that industrial policy has an original flaw as it involves “picking winners,” something governments are simply unable to do effectively and in a better way than the market. Perhaps the best response is from Rodrik (2008), who argues that industrial policies are not about picking winners but about inducing a process of experimenting and discovering in which a Industrial Policy in Mexico 231 fundamental premise is “letting losers go”; in other words, the issue is to grant temporary stimulus. In this view, the problem with granting incentives or offering protection to nascent or infant industries lies not in making incorrect choices in some of the beneficiaries. The problem lies in maintaining those incentives or benefits for too long. This is a challenge that boils down to industrial policy’s design of incentives to ensure that they are not permanent, opaque, and unaccountable. Although some mistakes will be and have been made, given market failures, flaws, and absences, the overall working of the economy would be better with properly designed policy interventions. Some of the critics that emphasize the state’s inability to “pick winners” as a case against industrial policy simultaneously favor focalized social policies—such as conditioned cash transfers—that are based on the assumption that the state has the ability to pick “losers” at the individual or family level.

On a practical level, the reactions of the government of various developed countries to the international financial crisis—for example, the Obama administration—included the direct, conspicuous, and major intervention of policymakers at the individual firm level of major private manufacturing corporations and financial institutions to temporarily protect them, strengthen their financial positions, and invest in them, all to put them back on track. In some cases this included programs to steer private and public expenditure to buy domestically made products.

In addition, and relevant for the Mexican case, another important myth is that there is very little that industrial policy can do, given the nation’s commitment to comply with international trade agreements, mainly those signed under NAFTA and the World Trade Organization. This is false. There are key restrictions, among them the commitments to refrain from erecting trade barriers, granting direct subsidies to exports, imposing price controls on traded goods or performance requirements—such as on trade balance or local content—on FDI. But these still leave ample space for industrial policy interventions to use financial and fiscal incentives to promote research and development and innovation, to adopt buylocal policies in government purchases and contracts, and to use fiscal and financial resources to build up the technical and education capacities of the work force (see Cardero, 2012). Fostering industrial clusters is permitted, as is promoting services and practically everything that helps move faster toward lower carbon emissions and a green economy. The quid is not whether there is space for industrial policy action within the boundaries set by our international commitments. The quid is whether there is the political will and the fiscal cum financial muscle to implement an industrial policy—and for that matter a new agenda for development agenda—that significantly contributes to insert Mexico onto a path of high economic expansion with equality.

There is the issue of whether industrial policy should stick to strengthening existing comparative advantages or also engage in stimulating the creation or buildup of new comparative advantages. Those in the mainstream economics perspective that have accepted the case for industrial policy on practical and theoretical grounds favor the first position and strongly oppose the second. The government policy interventions that they are willing to consider as part of the industrial policy toolkit include an ample gamut that goes from across-the-board measures to facilitate start-ups, to reduce transaction costs, and to strengthen 232 Latin American Policy already existing industries with proven competitive advantages in export or domestic markets. They shy away from interventions that aim at creating new competitive advantages. They may be wrong if the latter endeavor is conceived as an action to be taken, not by the state in isolation, but as a part of a long-term cooperation between the government and the private sector.

The economies that enter a trajectory of robust and long-term development are not those whose competitive advantages remain frozen, but those that are systematically upgrading their competitive advantages in an intense process of creation–destruction, reinventing their capacities to enter successfully into new, technologically sophisticated links in dynamic global value chains in world markets. Most important, significant backward and forward linkages with their domestic markets mark their export sectors. In the case of dynamic large economies, their interactions with the competitive productive sector that tends to the domestic market may lead to a virtuous circle of high economic growth.

Finally, there is the myth that implementing an industrial policy ensures a transformation of the productive structure that will lead to high and sustained economic growth. No such result can be guaranteed. Many other factors, exogenous and endogenous, have a decisive influence on the growth trajectory of an economy. What can be assured is that, without a significant and active industrial policy, the quest for growth of any large-sized economy has much lower possibilities of success and is likely to be “bound in shallows and in miseries” (Shakespeare, 1967).9

Conclusions

By its very nature, industrial policy is selective as it explicitly and decisively chooses to foster some activities in its attempt to bring about a structural transformation of the economy that is more conducive to insert it in a platform of high growth, according to policymakers. To the extent that it does so, it interferes with the free-market mechanisms of allocation of resources. It introduces distortions in them. For some purists this is bad enough because they consider virtually all government-induced distortions as unnecessary, negative deviations from the first best scenario or outcome that would result from free market operation. Once it is recognized that some markets simply do not exist and other key markets have major, significant failures and imperfections, the introduction of such distortions by government policy may go a long way to augment material benefits for the society as a whole, beyond what the maximization of private benefits by individual firms in market competition would imply.

Government responsibilities imply that its interventions in the economy must have a longer-term horizon than the private sector on the desirable evolution of investment and the composition of the economic structure. It must have the capacity and commitment to consider key differences in its actions between private and social marginal benefits. At the same time, the government has the possibility of, or even the obligation to, use macroeconomic and other policies to intervene counter-cyclically in the economy to reduce adverse effects of external shocks in its level of production and employment. Industrial policy can play a decisive role to help achieve a long-term trajectory of higher economic growth.

Industrial Policy in Mexico 233 There is consensus that industrial policy should openly foster activities or links in global chains of value added that: (1) are marked by increasing returns to scale and have large positive externalities on the rest of the economy; (2) have high fixed costs to entry, be it in terms of finance, innovation, or others; or (3) are strategic in terms of national interest or because international competitors are actively applying industrial policies to foster their development (see Ciuriak & Curtis, 2013).

The new administration that took office in December 2012 has admitted to the need to implement an industrial policy as part of an agenda to promote faster economic growth. Industrial policy has always been an instrument in Mexico’s development toolkit in practice, though with varying orientations and degrees of state direct intervention in the economy. The explicit return of industrial policy in the discourse of its development agenda is welcome. Such return allows for an open discussion and debate on the challenges, merits, limitations, costs, effects, resource requirements, and instruments of alternative versions of what is or should be a modern industrial policy for the Mexican economy today, given the global context that is marking the world economy in the early years of the 21st century.



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