Latin America’s Development after the Washington Consensus

Velia Govaere June 2014

Competitiveness Promotion Council of Costa Rica

Current Conditions for Development Models in Latin America

1. A globalized world, united by trade and where production of goods increasingly occurs through integration in global value chains

2. Developing countries need to find their own space and relevance

3. Knowledge-based society, where competitiveness and services occupy an increasingly important space

Globalization Arrives to LAC Accompanied by the Exhaustion of the ISI Model

• Axis: trade protectionism of local industry for: – Public policies for the development of value-added production

capacities, – Attraction of foreign direct investment towards protected market

niches– Weakness: This model left local production outside of international

competition – Protecting industries that were not competitive internationally did

not promote the arrival of investments for the development of high-tech industries

• Central America: These conditions worsened:– Small market – Very low dynamism due to the population’s low purchasing power

Political Mediums have Changed, but their Objectives Remain the Same

• Sponsor industrialization with the creation of national productive capacities

• Diversify production harmoniously • Articulate the domestic business fabric with

international consumption and productive demands

• Integrate into global value chains• Generate quality employment

A New Paradigm Based on The Washington Consensus

Structural Adjustments(1) State intervention in industrial promotion is

restricted(2) Trade protectionism is abandoned(3) The economy is opened to international trade, with

the double need to:(a) Increase its own competitiveness to position its

exports in the international market and (b) Expose its internal market to the strong

competitiveness of its imports

The Costarican Case

• Resources-led vs value-added export model.• CR-Emblematic example of value-added export

model– trade openness, – creates a broad export platform (FTA),– supports attraction of foreign direct investment

under free zones regimes, – oriented towards high-tech productive specialization– Creation of an institucional cluster

¿Why is Costa Rica Emblematic?

With a population of only 4.5 million:• Most important exporter of high-tech products in LA• Most important goods exporter per capita in Latin America• Export offer of more than 4,500 products to 150 countries• Ranked fourth in the world in proportion of high tech exports

Structural transformation of its exports• In the 90s: primary goods were 57.6%, now only 26%.• In the 90s: high and medium-tech manufacturing products

were 9.3% , in 2000 48.5% .• High tech went from 3.2% to 36.5%• Increase of services exports (from 27% 2000 to 32,9% 2012)

30 years latter …Total Export Growth

(millions of US current dollars)

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

/a

Gráfico 4: Exportaciones totales de Costa Rica(en millones de US$ corrientes)

Fuente: BCCRNota: Los datos del 2010 son preliminares

30 years latter …Diversification of Exports

395 79

9

3.07

7

3.26

1

3.30

6

3.34

2

3.45

3

3.56

5

3.59

9

3.64

4

3.79

7

4.01

4

4.08

0

4.11

5

4.23

8

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1986 1989 1993 1999 2000 2001 2002 2003 2004 2005 2006 2007* 2008 2009 2010

Gráfico 6: Número de Productos Exportados(Costa Rica, Partidas Arancelarias con exportaciones > US$200)

Fuente: PROCOMERNota: (*) En 2007 se implementa IV Enmienda con apertura de nuevas partidas,

After 30 yearsChallenges and Pending Tasks

The positives:• High-tech industrial foreign investment was

efficiently attracted and a powerful structural transformation of exports was produced

The challenge:• This structural transformation was not

generalized to the entire productive fabric • A lack of an integral industrial policy.

Results and Relevant Challenges for Latin America

“the increase in manufacturing exports, in particular of those linked to different special regimes, has not been translated into the scaling of productive activities and sectors in which technological learning processes are deepened, diffused or accelerated or in processes that generate more technological and productive capabilities” (CEPAL, 2010)

Weaknesses in the Model (1)

• Free trade zone exports excluded, the main exports are primary agricultural products

• Solely domestic productive processes are not those with high technological content– 48.5% of Costa Rican exports, of multinational

companies in the free trade zone, have a noteworthy orientation towards medium and high-tech manufacturing but are linked to the domestic productive process in manufacturing and assembly, which are scale intensive and require low skilled labor.

Weakenesses in the Model (2)

Volume and diversification but highly concentrated exports of low national added value:• 2% of companies contribute to more than 70%

of exports• 73% of companies export less than 1%• Out of every US$7 of export value, only US$3

correspond to national value added

Weakenesses in the Model (4)

Trade balance is unsustainable in the long run: Over the last 13 years, imports grew at an annual growth rate 50% higher than that of exports– In the year 2000, the negative balance in goods

was only 2.8% of GDP, – In the year 2012, it increased to 13.8% of GDP– 98% of this trade deficit has been balanced with

foreign direct investment, but FDI has decreased 32% in the last four years in the case of manufacturing

30 years latter …Trade Balance 1985-2010 (million $US)

-6.000

-4.000

-2.000

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

/a

Gráfico 8: Balanza Comercial de Costa Rica(de 1985 a 2010, en millones de US$)

SALDO IMPORTACIONES EXPORTACIONESFuente: BCCRNota: Los datos del 2010 son preliminares

Weakenesses in the Model (5)FDI has an important macroeconomic impact• Balances trade balance at an average of 98% and

generates well payed jobsBUT…

IED has minimal impact on the local productive system• Low investment in research and development• Lack of integral industrial policies– is unlinked from the local productive fabric– can offer limited technological spillovers

Lack of R&D Policies and education imbalances

• Lack of fiscal incentives for research and innovation• Non Qualified labor force is 60%, only 16% less than in 1987• Qualified labor force grows at a rhythm of 0.65% per yearBetween 2011-13:– 3 out of 4 people who searched for a job for the first time, and were

not able to find one, had not finished high school– 8 out of 10 people who lost their jobs did not have high school studies

• Concentration of university enrollment (between 1990 and 2000):• Education and Social Sciencies: 48%, • Basic sciences, agriculture, and engineering: between 1.2% and

11.6%.

Productive Heterogeneity and Growing Inequality

In Costa Rica social investment has increased to historical levels, but instead of decreasing, poverty levels have stagnated and inequality has increased. Second or third in human development, it is the country in Latin America that has experienced the greatest growth in inequality• Over the last 18 years, 1 out of 5 Costaricans is

poor • In the last 22 years, the gap has increased,

reflected in a change of 16 Gini points• The richest quintile has 18.4 times more income

than the poorest quintile (ENAHO, 2012).

Gini Concentration Coefficient

Pending Agenda for a New Consensus

The successes of trade openness and FDI attraction are recognized but the need to introduce productive transformation policies is also understood. Countries as Mexico, Chile, Brazil have already taken that road.

Timing and importance of a “road map” from KSP-Corea:• Institutionalization of competitiveness promotion• Holistic long-term productive strategy• Incentives and policies that promote linkages,

technological transfer, creation of capabilities and research, development and innovation activities in the private sector

Thank You!