Explanatory notes. The following symbols are used in tables in this publication:

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2 The preparation of this document was coordinated by José Luis Machinea, Executive Secretary of ECLAC, in collaboration with Juan Martín, Coordinator of the Office of the Executive Secretary, and Mario Cimoli, coordinator of the area of innovation and information and communication technologies of the Division of Production, Productivity and Management. The following persons, in addition to the coordinators, were in charge of drafting the different chapters: Robert Devlin, René Hernandez, Luis Felipe Jiménez, Graciela Moguillansky and Johan Mulder, with the collaboration of Miguel Torres and Cecilia Vera. Ernesto Ottone, Deputy Executive Secretary of ECLAC, provided comments and contributions. Various divisions of ECLAC participated in the preparation of the document, in particular the Division of Production, Productivity and Management, the Division of International Trade and Integration and the Division of Economic Development. Martine Dirven, Osvaldo Rosales and Osvaldo Kacef, Officer-in-Charge and Directors of these divisions, respectively, provided valuable input and, in some cases, participated in the drafting of the different chapters. The subregional headquarters and national offices also collaborated. Contributions and comments were provided by the following ECLAC staff members: Olga Lucía Acosta, Vianka Aliaga, Mariano Álvarez, Renato Baumann, Omar Bello, Ricardo Bielschowsky, Binesware Bolaky, Inés Bustillo, Alvaro Calderón, Carolina Cavada, Jaime Contador, Martha Cordero, Agustín Cornejo, Nelson Correa, Claudia de Camino, José Durán Lima, Alfonso Finot, Rodrigo Heresi, Daniel Heymann, Martin Hilbert, Raúl Holtz, Juan Pablo Jiménez, Valeria Jordán, Bernardo Kosacoff, Mikio Kuwayama, Salvador Marconi, Jorge Mario Martínez, Jorge Máttar, Michael Mortimore, Alejandra Ovalle, Ramón Padilla, Wilson Peres, Esteban Pérez, Neil Pierre, Annalisa Primi, Adrián Ramos, Carlos Razo, Mónica Rodrígues, Indira Romero, Sebastián Rovira, Claudia Schatan, Marcia Tavares, Christian Velásquez Donaldson and Jürgen Weller. The following consultants contributed to the different chapters: Facundo Albornoz, Thomas Andersson, Guillermo Anlló, Gustavo Baruj, Vladimir Benacek, Roberto Bisang, Ilán Bizberg, Antonio Bonet, María Alejandra Botiva León, Mercedes Campi, Verónica Cesa, Hugo Chaves Arce, Terry Cutler, Pedro da Moita Veiga, Carl J. Dahlman, Piero Formica, Hernando José Gómez Restrepo, Ana María Guerra Forero, Graciela Gutman, Nigel Haworth, Annette Hester, Jorge Katz, Heikki Kotilainen, Scree Kumar, Pablo Lavarello, Andrés López, Virginia Mori, Shankaran Nambiar, David O Donavan, Carlos Pacheco Américo, Rodrigo Paillacar, Juan José Palacios L., Carlota Pérez, Gabriel Porcile, Daniela Ramos, Joseph Ramos, Sandra P. Rios, Sharon Saddique, José Segura Garita, Ricardo Sennes, Ramjee Singh, Basel Springer, Iván Torre, Lia Valls Pereira, John Wilkinson, Hong Yoo Soo and Soledad Zignago. Explanatory notes The following symbols are used in tables in this publication: Three dots ( ) indicate that data are not available or are not separately reported. A minus sign (-) indicates a deficit or decrease, unless otherwise indicated. A full stop (.) is used to indicate decimals. Use of a hyphen (-) between years (e.g., ) indicates reference to the complete period considered, including the beginning and end years. The term dollars refers to United States dollars, unless otherwise specified. Figures and percentages in tables may not necessarily add up to the corresponding totals due to rounding. Distr. General LC/G.2367(SES.32/3) May 2008 Original: Spanish United Nations Printed in Santiago, Chile

3 CONTENTS Contents Introducción...13 Chapter I Latin America and the Caribbean in the world: trends and opportunities...17 A. A long-term view...19 B. Economic growth and productive transformation The diversification of the production structure and technical change Economic growth policies: alternatives and some general criteria...29 C. Today s global economy The global situation: present risks and long-term factors Changes in the global production structure Changes in global demand...43 D. A new opportunity for Latin America and the Caribbean The regional situation The options for the region s countries...51 Chapter II Economic growth in Latin America and the Caribbean: structural change and export development...59 A. Characteristics of the region s economic growth Low and volatile growth rates A lacklustre performance in terms of investment and the financial system The burden of external constraints

4 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC B. Production structure, productivity and growth Evolution of the production structure and productivity The revitalization of the production structure and its effects on growth C. Exports and growth Global growth Diversification The technological content of exports D. Other technological externalities associated with integration in the global economy Trade-related externalities Externalities related to foreign direct investment Chapter III Innovation and economic development A. The scientific and technological capacity of the region s countries B. The innovation dynamism of Latin American businesses Innovation and company performance Some factors affecting innovations Innovation dynamism of companies: efforts and opportunities C. Learning, quality and the integration of Latin America and the Caribbean into the world economy Quality and technological intensity of exports Learning and quality in the natural-resources sector: agriculture Opportunities for differentiation and quality upgrading Chapter IV Techno-economic paradigms: ICTs and biotechnology A. The information and communication technologies (ICTs) paradigm Origin and development Development of the information society and new opportunities in Latin America and the Caribbean B. Scope and opportunities of the biotechnology paradigm Development and principal trends of production reorganization Efforts and opportunities in Latin America and the Caribbean Chapter V Opportunities associated with the restructuring of production sectors A. Learning patterns in the manufacturing industry Industrialization and international integration Export manufacturing industry B. The agrifood complex Innovation and learning in the agrifood complex Spread of biotechnology in the agrifood complex Public institutions and local private agents C. Metal mining in Latin America and the Caribbean Multinational corporations: production and technology strategies Technology and production trajectories in Latin America D. Services: specialization and technology learning Trends in the international trade in services Performance and trajectory of the other services segment Shared service centres Other services in Costa Rica and Mexico

5 CONTENTS 5. Clinical research services Advertising and audiovisual productions Tourism The spread of technological capacity in the services sector E. Trajectories and learning opportunities in value chains Chapter VI Public-private alliances for structural change, productivity growth and closer integration with the world economy A. The nature of national strategies Characterization of countries Strategies: stylized facts Four strategic orientations B. The nature and role of public-private alliances The scope of public-private alliances Consensus-building C. Institutional framework for strategy formulation and implementation Principles relating to the agencies that formulate and execute the strategies Management of incentives Strategy assessment Risk of capture D. Relevance of other regions experiences for Latin America and the Caribbean Annex - Strategies in selected countries Chapter VII Concluding remarks Bibliography Tables Table I.1 Disparities between the world s regions, Table I.2 Convergence and divergence in per capita output, by region, Table I.3 Intraregional trade, by geographical grouping Table I.4 Projection for urban consumption in China Table II.1 Annual growth rate of total factor productivity Table II.2 Infrastructure capital stock Table II.3 The economic development process and FDI strategies Table II.4 Summary of studies on the technological spillovers of FDI in Latin America and the Caribbean and in other regions Table III.1 Indicators of scientific base and innovation efforts and effectiveness Table III.2 Innovation: links to productivity and exports Table III.3 Brazil: skilled workers and level of wages by type of innovative firm Table III.4 Selected countries: cooperation and innovation Table III.5 Exports: upgrading and downgrading matrix Table III.6 Indicators of specialization in import markets of developed countries (SP) Table III.7 Analysis of comparative advantages and average prices of some agricultural chains Table IV.1 The industries and infrastructures of each technological revolution Table IV.2 Increase in installed capacities and reduction of prices for the ICT technology frontier between 1980 and Table IV.3 Sales and exports of the software and services industry,

6 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC Table IV.4 Principal activities in the biotechnology paradigm Table IV.5 Member countries of the Organisation for Economic Co-operation and development (OECD): expenditure on biotechnology research and development and sales, Table IV.6 Performance indicators and biotechnology capacity in selected countries Table V.1 Export coeficients of the manufacturing industry, Table V.2 Manufactures as a proportion of total exports, 1990 and Table V.3 Mid-level- and high-technology products as a proportion of total exports, 1990 and Table V.4 Latin american hi-tech export products with a rising share in OECD imports, Table V.5 Dominican Republic-Central America-United States free trade agreement (DR-CAFTA) and Mexico: total exports from maquila and free zones compared with United States imports Table V.6 IMANE exports and imports in relation to total exports and contribution to value added, Table V.7 Mexico: value added (VA) of the maquila industry by components of the gross value of output (GVO), Table V.8 Employment in IMANE, Table V.9 Maquila export industry: value added in relation to the gross value of output, Table V.10 Latin America and the Caribbean: contribution of the agricultural sector to output and exports Table V.11 Main trends in agrifood innovation Table V.12 Development in agro-biotechnology Table V.13 Composition of sales in selected firms, Table V.14 Biotechnology applications to animal genetics Table V.15 Main multinational firms in agrifood systems, Table V.16 Innovative Latin American biotech firms, selected cases Table V.17 The 10 leading mining companies, ranked by output, Table V.18 Latin America and the Caribbean: share of mining output (pithead/ refined metal), Table V.19 Service exports: level, composition and annual growth rates, 1985 and Table V.20 Selected Caribbean countries: multipliers, leakages and some Table V.21 determining factors Textile and clothing, automotive and electronics industries: quasi hierarchical and hierarchical structures Table V.22 Agro-industry and mining: market relations and quasi hierarchy Table V.23 Services: hierarchy Table VI.1 Selected countries: general indicators Table VI.2 Selected countries: trade indicators Table VI.3 National strategies: selected landmark events Table VI.4 National plans Table VI.5 Four strategic orientations for strengthening integration with the world economy. 241 Table VI.6 Strategic orientation: FDI attraction Table VI.7 Strategic orientation: internationalization of businesses Table VI.8 Strategic orientation: export promotion Table VI.9 Strategic orientation: innovation Table VI.10 The nature of public-private alliances in national strategy formulation Table VI.11 Nature of public-private alliances for strategy implementation Table VI.12 Political entities responsible for the strategy of structural change and productivity growth Table VI.13 Main agencies implementing programmes and policies in the area of integration with the world economy Table VI.14 Typology of programmes and instruments in areas of strategic orientation

7 CONTENTS Boxes Figures Box I.1 The dispersion of per capita output growth rates in the developing world Box I.2 Productive diversification and economy size Box I.3 The dynamism of world trade Box I.4 Terms of trade in the two phases of globalization ( and ) Box II.1 Natural resources and growth: opportunity or curse? Box II.2 Competitiveness of Latin American exports Box II.3 Introduction of new products and export destination in the mediumand long-terms Box II.4 Total variety of intermediate inputs and capital goods Box II.5 Export sophistication Box II.6 Trans-Latin enterprises Box III.1 Brazil: law on innovation Box III.2 Competition for products and varieties: the cases of China and Mexico Box V.1 Public polcies for capacity-building: the argentine nuclear industry and the brazilian aerospace industry Box V.2 New strategies in the clothing industry in the Caribbean Basin Box V.3 Active innovation policies in Jalisco, Mexico Box V.4 Transgenic crops in Latin America Box V.5 Public institutions Box V.6 State-owned enterprises and firms with a large proportion of local capital Box V.7 The export of ICT-enabled services from Latin America Box V.8 Service exports: new opportunities for Central America and the Dominican Republic Box V.9 Tourism in the Dominican Republic Box VI.1 The National Economic and Social Council (NESC) of Ireland: structure and operation Box VI.2 National Economic and Social Council (NESC), ireland: methodology for building consensus Box VI.3 Political attention at the highest level as the driving force behind priority initiatives Box VI.4 Alberta Oil Sands Technology and Research Authority (AOSTRA): leading innovation to exploit oil sands in the Province of Alberta, Canada Box VI.5 Prospective analisis in Finland Box VI.6 The Autonomous Community of Andalusia: a subnational case Box VI.7 Efficiency of tax credits for research and development Box VI.8 Allocation of FDI incentives Box VI.9 Example of a checklist for programme conceptualization and design Box VI.10 Finland: evaluation of the electronics and telecommunications programme Figure I.1 Distribution of research and development spending, by region Figure I.2 Latin America and the Caribbean: trend and cyclical GDP, Figure I.3 Market segmentation Figure I.4 Latin America and the Caribbean: per capita output growth, Figure II.1 Standard deviation of GDP growth rates Figure II.2 Latin America and the Caribbean (32 countries): total net private capital flow and annual GDP growth Figure II.3 Latin America: real effective exchange rate and total net private capital flows

8 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC Figure II.4 Latin America (7 countries): primary deficit and public infrastructure investment Figure II.5 Latin America and the Caribbean (19 countries): gross fixed capital formation as a percentage of GDP, Figure II.6 Financial deeping and per capita GDP, Figure II.7 Latin America (19 countries): the current account as a percentage of GDP and GDP growth Figure II.8 Latin America (18 countries): ten-year growth rate in the volume of exports Figure II.9 Percentage change in the terms of trade Figure II.10 Latin America (19 countries): current transfers (credit) Figure II.11 Contribution of growth factors (selected countries) Figure II.12 Latin America and the Caribbean: manufacturing sector share of total value added Figure II.13 Share of engineering-intensive industries in manufacturing output, compared to the world average Figure II.14 Relative labour productivity in Latin America compared to that of the United States, by specialist manufacturing sector, Figure II.15 Population with higher education in Latin America and the Caribbean and in developed economies Figure II.16 Structure of exports and GDP of the tradable sectors, Latin America, 1990 and Figure II.17 Share of world trade in goods and services, Figure II.18 Latin America and the Caribbean: share in the value of world exports Figure II.19 Exports concentration measured by the Herfindahl-Hirschman index, to Figure II.20 Composition of exports by technological content, Figure II.21 Exports of services from Latin America and the Caribbean: country and subregional shares (1985 and 2005) Figure II.22 Ratio between exports and production in economies of scale industries, 1995 and Figure II.23 Trade in machine components and parts as a percentage of the sector s total trade, Figure II.24 Cumulative foreign direct investment as a percentage of GDP, Figure III.1 Selected countries: innovation efforts and per capita income Figure III.2 Selected countries: effectiveness of patents in terms of investment in research and development Figure III.3 Latin America (5 countries): productivity differences among innovative and non-innovative companies Figure III.4 Selected countries: distribution of sales by type of product Figure III.5 Latin America (5 countries): spending related to innovation by type of activity Figure III.6 Unit values and quality of exports by category of technological intensity, Figure III.7 Latin America and the Caribbean: exports from each quality segment as a proportion of total exports, by technological category, 1995 and Figure III.8 Latin America and the Caribbean: share in world trade, by technological category and quality segment, 1995 and Figure III.9 Upgrading and downgrading, as a proportion of total exports from Latin America and the Caribbean and other emerging regions, Figure III.10 Latin America and the Caribbean and reference countries: relative unit values of imports into the markets of the developed countries, and Figure III.11 Latin America and the Caribbean and reference countries: relative unit values of imports by countries in developed country markets,

9 CONTENTS Figure III.12 Figure III.13 Latin America and the Caribbean and reference countries: relative unit values of imports of different product categories in the markets of developed countries, Latin America and the Caribbean and reference countries: relative unit values of imports of different production chains in developed country markets, Figure IV.1 Ratio of information transmission cost and performance by technology Figure IV.2 ICT penetration in Latin America and the Caribbean and in OECD countries, 2002 and Figure IV.3 Information storage capacity on hard and floppy disks, memory cards, and optical solutions in Latin America and the Caribbean and in the Organisation for Economic Co-operation and Development (OECD) Figure IV.4 Communication capacity via fixed and mobile telephony and the Internet in Latin America and the Caribbean and in the Organisation for Economic Co-operation and Development (OECD) Figure IV.5 Businesses and organization with network-enabled applications by areas of work in Latin America and the Caribbean, Figure V.1 Industrialization coefficient, 1990 and Figure V.2 United States: market shares of selected countries, Figure V.3 Market share of the textile and clothing industry of selected countries in United States imports, Figure V.4 Market share of the automotive and vehicle parts industry of selected countries in United States imports, Figure V.5 Market share of the electronics subsector of selected countries in United States imports, Figure V.6 Exports of other services : share in world trade and Latin American and Caribbean exports, 1985 and Figure V.7 Advertising service exports, Argentina and Brazil, Figure V.8 Tourism service exports and spending per tourist, 1985 to Figure VI.1 Convergence of countries with structurally-oriented strategies, compared with Latin America and the Caribbean Figure VI.2 Convergence of countries with less structurally-oriented strategies, compared with Latin America and the Caribbean Figure VI.3 Alignment of strategy policies and programmes Figure VI.4 The playing field for public-private alliances Figure VI.5 Position of countries in terms of alliances Figure VI.6 Singapore: boards of agencies supporting integration with the world economy Figure VI.7 Ireland: cross representation on the boards of directors and councils of bodies implementing the export development strategy Figure VI.8 Singapore: coordination of innovation institutions Figure VI.9 Finland: planning and coordination among agencies Figure VI.10 Administrative structure of main innovation programmes and agencies in Australia Figure VI.11 Functional links between support programmes: the example of SMEs Figure VI.12 Interventions in support of innovation: the case of Australia Figure VI.13 Programmes and policies and the nature of public-private participation Figure VI.14 The cycle of return on incentives in Finland

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11 INTRODUCTION Introduction Nearly 20 years ago, ECLAC put forward a proposal for structural change and productivity growth with social equity. At the time, the countries of the region were emerging from the severe crisis of the 1980s, with all its associated difficulties in terms of internal stabilization and external adjustment, and headed into a decade of structural reform which heeded the call of the Washington Consensus. In the midst of perplexity and pessimism regarding the region s prospects, ECLAC espoused a view of the situation that ran counter to the extremely orthodox line of thought that marked economic policy tenets of the time. The idée-force underlying this view situated the region within the universe of developing countries and highlighted the deteriorating situation by using the metaphor of an empty box to symbolize the difficulties that the region was having in reconciling growth with social equity. This proposal for structural change and productivity growth was thus aimed at promoting economic expansion and social equity, not sequentially, but at one and the same time. In addressing the issue of economic growth, ECLAC started out by taking stock of the major changes that were then taking place in the world and the way in which they were redefining a recurring theme in its thinking: the generation and propagation of technical progress. It contended that, in order to achieve technical progress and boost productivity, the region s economies had to become more open, but it also drew a distinction between genuine and spurious competitiveness and emphasized the systemic nature of this phenomenon. At the same time, it maintained that the transition to greater economic openness should be gradual, should place priority on exports, and should be underpinned by a stable competitive real exchange rate. Unfortunately, 13

12 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC the way in which the region s economies were opened up during the 1990s exhibited very few traces of these essential components of structural change. At the same time, given the absence of social equity, it was important to adopt an integrated view of development. This approach departed from unilateral perspectives according to which economic policies and social policies were two completely different and separate spheres of activity which would, nonetheless, naturally tend to balance each other. ECLAC argued that, without the type of growth that would strengthen the demand for skilled labour and create opportunities for small and medium-sized enterprises, it would be very difficult for the region to increase social equity or achieve a sustained reduction in poverty. This line of thinking clearly accorded preference to policies that would help attain both objectives. Hence the crucial importance of education as the foundation for this attempt to bring about structural change and productivity growth while achieving greater social equity. Throughout the 1990s and the early years of the following decade, ECLAC continued to develop various aspects of this integrated approach to structural change, at times focusing more on economic issues, at times highlighting social considerations, but at all times setting its proposals within the institutional context of the region. At no time did these shifts in emphasis detract from its integrated conceptualization of the development process. In fact, ECLAC has always approached economic, social and institutional issues as an integral set of interacting, mutually conditioning factors. How the relevant measures are organized and how much time is devoted to each dimension are also important factors, however. In recent works, we have stressed the social dimension, which, all the same, has invariably entailed economic and institutional considerations. This has certainly been the case in the documents issued most recently by ECLAC, such as Shaping the Future of Social Protection and Social Cohesion: inclusion and a sense of belonging. In the analysis presented in this volume, we will focus on economic and institutional issues: on the what and the how of our proposal for bringing about structural change and productivity growth in ways that are in keeping with the times, while remaining mindful of their social dimensions. The pace of the global changes that were discussed in our 1990 proposal has accelerated, and new actors have emerged which have significantly altered pre-existing balances in the world economy in terms of both supply and demand. These events have triggered major structural changes. The time has therefore come to re-examine our views on structural change and productivity growth in the light of new circumstances in order to determine if new opportunities can help to overcome old problems. The countries of Latin America and the Caribbean find themselves in varying positions in terms of competitiveness and learning, and it is on the basis of these positions, in conjunction with their stock of resources and capacities, that they take part in the global economy. Diversifying and developing these positions is the crux of any strategy for structural change and productivity growth. Although such strategies must clearly have national characteristics, closer coordination and greater economic integration among the countries of the region would be of enormous help in achieving greater economies of scale, complementarities and lessons learned. Moving forward with this task within the framework of each national reality will entail mobilizing a broad range of diffuse social energies, and public policy plays a key role in this respect. It is important, first of all, to organize each country s search for a medium- and long-term vision within the global context and catalyse efforts to detect present and future opportunities. Second, it is also crucial to build lasting alliances with the private sector based on reciprocal benefits and commitments that will make it possible to formulate and implement strategies for gradually making that vision a reality and taking advantage of the opportunities that present themselves. 14

13 INTRODUCTION All of this requires the formation of a wide-ranging consensus capable of underpinning agreements in various spheres of national affairs. Viewed from this vantage point, the integrated approach to development that is so much a part of the Commission s thinking takes on renewed significance. Although proposals in given areas may be analytically separable, the type of broad national consensus that can make such proposals viable is necessarily multidimensional. In other words, in the fullest sense of the proposal for bringing about structural change and productivity growth with greater equity, social consensus-building must encompass an inseparable whole involving a unified array of agreements concerning growth, social equity and institutional development. Chapter I examines the region s performance in the world economy, along with the opportunities that are opening up for Latin America and the Caribbean in the new global economic environment. An analysis of long-term trends relating to convergence and disparities in per capita GDP is followed by an exploration of economic growth processes and structural changes in the production sector. The discussion then turns to the main changes that have occurred in the world economy from the standpoint of both the organization of production and business models and the appearance of a simultaneous shift towards the massification and stratification of demand at the international level. The final part of this chapter looks at the strengths of the region s economic performance in recent years and at basic lines of action for bringing about structural changes and productivity growth that will enable the countries to deepen and diversify the ways in which they position themselves within the international economy. Chapter II reviews the region s economic and export performance in the past quarter century. It begins by examining macroeconomic trends in the region, with emphasis on the internal and external elements that played a role in the slow, volatile economic growth that characterized the region from 1980 until its performance began to improve in It then goes on to analyse productivity gains as a growth factor and their close relationship to the dynamics of the production structure. Emphasis is placed on a number of productivity determinants, such as the application of knowledge to economic activities, the diversification of the production structure and the efficiency of service delivery with respect to physical infrastructure. The chapter concludes with a consideration of the way in which exports have helped to promote structural change and drive growth since 1980 through their aggregate contribution, product and market diversification, incorporation of knowledge and the technological externalities generated by trade and foreign direct investment. Technological dynamics in the region and opportunities for improving the performance of companies and the products they export are the main focus of chapter III. A comparison of national R&D efforts and their relative effectiveness is followed by an examination of corporate innovation in various countries of the region and an analysis of its impact on productivity, wages and exports. Obstacles to the further development of process and product innovations are also identified. The unit prices of exports are then used to assess the region s capacity for positioning itself in the international economy more successfully by adding quality to its exports. To this end, the quality of its current exports is evaluated by comparing the prices of goods exported by the region with those of similar goods from developed and developing regions. The region s share of world trade over the last decade, disaggregated by level of quality, is also analysed. Finally, in view of the importance of agricultural goods for Latin America and the Caribbean, a more extensive discussion is offered of the region s position in world (and especially developed-country) markets for these products. In the light of the evidence presented in the course of this analysis, a number of ways of improving that position in terms of export quality are explored. Chapter IV looks at the emerging opportunities for the countries of the region that are associated with multi-purpose technologies. To this end, a techno-economic paradigm is used that employs the shared evolutionary path of technological changes and economic development as a 15

14 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC basis for understanding how the region reacts to and engages in the diffusion of these technologies in the economic and social spheres. The implications of information and communications (ICT) technologies are described, together with the elements that must be in place in order for society as a whole, the economic system, infrastructure and industry to adapt to the new processes and products that these technologies engender. The focus then turns to an analysis of the tendencies that are shaping corporate strategies and forms of industrial organization as they relate to the incipient diffusion of biotechnology. Consideration is also given to the efforts required to create a system capable of increasing and directing R&D and human resources in ways that will stimulate the adaptation and absorption of these new technologies. Given the heterogeneity of the Latin American and Caribbean countries production structures, any analysis of opportunities and challenges requires a sector-by-sector evaluation. This assessment is undertaken in chapter V, which describes the learning processes and technological capacities found in four different sectors which are characteristic, on differing scales of relative importance, of the production structures and international economic integration of the different countries of the region. These sectors are the agroindustrial complex, mining, manufacturing (both those industries left as a legacy by the import-substitution industrialization (ISI) model and exportoriented manufacturing industries) and services. An analysis is then undertaken of the windows of opportunity that are being opened up in each of these spheres of competitiveness and learning by new cross-cutting technological paradigms. In the final section, the opportunities for achieving upgrading in the global value chains of various products are examined. Drawing on the foregoing analysis of opportunities and challenges for bringing about a more dynamic process of structural change and productivity growth, chapter VI explores the strategic modalities that have been adopted by a number of countries outside the region that are regarded as being success stories. This analysis focuses on determining how these countries have organized public-sector institutional processes relating to the development and implementation of mediumand long-term national strategies within the framework of a public-private alliance. An examination of the various organizational procedures employed by the public sector and its support programmes for promoting structural change, productivity growth and international economic integration serves as the basis for the formulation of 12 first principles in this connection. The same parameters are then used to determine where the Latin American and Caribbean countries stand in terms of the creation of a strategic national vision, public-private alliances and consensus. This appraisal suggests that these principles are indeed relevant for a region which needs to deepen and diversify its production apparatus within the framework of today s globalization process. Chapter VII presents a number of concluding remarks and observations dealing with some of the central points made in this document, together with a discussion of opportunities for the region to move forward with a process of structural change and productivity growth that can accelerate the rate of economic expansion and help it to achieve greater social equity. 16

15 CHAPTER I LATIN AMERICA AND THE CARIBBEAN IN THE WORLD: TRENDS AND OPPORTUNITIES Chapter I Latin America and the Caribbean in the world: trends and opportunities The current phase of globalization is yielding unprecedented opportunities but is also creating uncertainty and difficulties in the economic, social, political and cultural life of millions. Extraordinary growth in world trade and dynamic technological change have been taking place even as inequality within and between nations has been rising. In these circumstances, what were once developing economies have been undergoing remarkable transformations, moving in a few generations from poverty to prosperity and forming a new group of emerging actors in the global economy. For all their special characteristics, these cases share a common element, which is their strong productive linkage with one or other of the three hubs (United States, Europe and Asia-Pacific) that account for the bulk of manufacturing and service activities, trade and investment and, most particularly, the human and material resources that drive technological progress. Section A examines the performance of Latin America and the Caribbean in this long-term evolution of the global economy. Since its early entry into the internationalization process, and up until the 1970s, the region s history might be summed up as a case of stabilization at an intermediate position in the global economy and of isolated and incomplete convergences, rather than as one of steady divergence from the developed countries and the new emerging actors. Only since 1980 has Latin America and the Caribbean fallen further behind these two groups, mainly because of the debt crisis in that decade and then the thwarted recovery of the 1990s. Thus, until strong growth resumed in 17

16 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC 2003, the region s performance was characterized by poor economic growth with highly volatile annual rates. The underlying causes of economic growth have been the subject of far-reaching theoretical study and reflection that began in the 1940s and in which ECLAC has been an important actor. The conclusions are that the development process does not take place gradually and automatically, since steady economic growth brings into play a variety of elements and mechanisms associated with the mobilization and allocation of resources and the social and institutional characteristics that provide the framework of motivations and incentives to which economic actors respond. Much of the analytical work that has been done on economic growth has sought to rationalize the existence of pathways of sustained expansion based on technical progress and, in particular, endogenous innovation processes tending to counteract declining yields. By allowing a larger quantity of goods to be incorporated into the production process, productive investment and diversification lead to steady increases in productivity across the board. This is why section B, after briefly reviewing some development models, stresses the importance of three interconnected and mutually reinforcing factors: investment, innovation and productive diversification. On this basis, certain general features of the economic growth process and the policy criteria involved are also highlighted from a regional perspective. For a more specific understanding, it is necessary first to analyse the environment in which these processes might take place. In a world of increasingly open and interdependent economies, a country s economic growth depends on the opportunities offered by product and factor markets and on the dynamics generated by ever-increasing international competition. On the one hand, the engine of globalization is fuelled by productivity growth resulting from the emergence of new technologies and faster change in existing ones, factors that have substantially altered the way production is organized in firms, production sectors and, ultimately, the global economy. These changes were given an enormous boost when China, India and the former Soviet Union opened up to trade and foreign direct investment. From the end of the 1970s, and particularly in the decade that followed, these economies gradually turned into leading actors in the new systems of productive organization and business models that provided the basis for the strategies of the most globalized firms. Given that each worker is also a potential consumer, meanwhile, the corollary of today s economic expansion in recently industrializing countries is enormous demand growth. This is causing a number of consumer goods to be produced and consumed on an unprecedented scale. At the same time, high incomes in the developed world, the growing concentration of personal income in both developed and developing countries and the greater diversity of consumer interests and lifestyles are leading to diversification and stratification in the consumption structure. A twofold development is therefore expected: an explosion in demand for various high-volume but low-value goods, and the emergence of consumption niches for high-priced differentiated, unique or personalized goods and services. Section C examines these trends in global production and consumption, an understanding of which is essential if new opportunities for participating in the global economy are to be explored. These developments paved the way for a boom period in the global economy, whose growth has been accompanied by deep structural changes. The countries of Latin America and the Caribbean have succeeded, each through different mechanisms, in capitalizing on the new conditions characterizing this phase of the global development cycle. Although the region has grown less than other emerging economies, by late 2008 it will have completed an expansionary cycle lasting six years, the longest and most vigorous period of growth since 1980 and the second since 1950 to have seen rates at these levels. Despite the current upheavals in the international situation, the structural changes which have accompanied this global development cycle are expected to carry on intensifying over the coming years. 18

17 CHAPTER I LATIN AMERICA AND THE CARIBBEAN IN THE WORLD: TRENDS AND OPPORTUNITIES Accordingly, section D considers how this global expansion might be taken advantage of to enable the region s countries to commit themselves to productive transformation processes that add greater value and knowledge, thereby expanding and modifying their traditional roles in the world economy. Each country s current position is the outcome of its particular pattern of participation in different areas of competitiveness and learning. The windows of opportunity now opening up in the new technological paradigms are having a fundamental impact everywhere, and no production sector is unaffected. If full advantage is to be taken of them, however, there will need to be a considerable internal technological effort to move the production structure progressively towards activities that hold out better prospects of generating and spreading innovations. Thus, technical progress and structural change, as ECLAC pointed out early on, have synergistic effects (ECLAC, 1990). Whatever the specific form that development strategies may take, innovation and productive diversification do not happen spontaneously and solely in response to market signals. The externalities associated with the innovation process and coordination and information failures have to be considered so that appropriate interaction procedures and incentive systems can be designed. In one way or another, this point has been highlighted in the classical texts on development economics and is plainly illustrated by the historical experience of what are now developed economies, as well as by cases of rapid convergence like those of the different Asian countries in the last half-century. The transformation of activities and behaviour, which is the outcome of a huge array of mutually complementary actions, is a collective process by its very nature and thus demands public policies that are designed to mobilize a wide variety of dispersed social energies. A. A long-term view Globalization is generally acknowledged to have generated historically unprecedented opportunities for progress in developing countries, but also to have created wholly new issues, problems and negative consequences for the social, political and cultural life of millions of people. Globalization is generating interdependence and imbalances and intensifying competition and inequality between nations. Indeed, widening disparities between regions and countries have been a characteristic of the global economy for the last two centuries (Pritchett, 1997). 1 The ratio between the per capita output levels of the world s most and least developed regions leapt from about 3 in the early nineteenth century to almost 20 in the early twenty-first century (see table I.1). 2 Thus, the world economy has acquired the configuration of an essentially unlevel playing field (Ocampo and Martin, 2003a; ECLAC, 2002). 3 This trend has some distinctive features (see table I.2). First, there was a period when per capita output was clearly converging, but only between the developed countries. This convergence took place between 1950 and 1973 among the industrialized countries that now form the Organisation for Economic Co-operation and Development (OECD), a period that has been called capitalism s golden age (Marglin and Schor, 1990), and the tendency has continued to this day. In one subgroup of the OECD, convergence was hastened by the creation of the European Economic Community, the predecessor of today s European Union, under the 1957 Treaty of Rome. 4 Successive increases in the number of member States brought more and more countries into the convergence process, including the Nordic countries and Ireland and the countries of the Iberian peninsula. Enlargement of the There has been a simultaneous tendency for internal income distribution to worsen in developed and developing countries alike. See Ocampo and Martin (2003a). This is the ratio between the most developed group of countries (except in 1820, this group is formed by Australia, Canada, New Zealand and the United States) and the least developed region (Africa or Asia, depending on the year) (see table I.1). As opposed to the concept of a level playing field that has been widely aired in recent international debates. The process can be traced back as far as 1951, when the European Coal and Steel Community was founded in Paris. Six countries were members: Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands. 19

18 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC European Union to take in the Baltic countries and those of central and eastern Europe has prepared the way for new accessions to this process. In each case, convergence was not spontaneous but the result of active policies. The explicit policies successively adopted for this purpose by the European Union are well known, of course, as is the volume of financing mobilized through structural and cohesion funds to make them viable. Equally well known is the extraordinarily important role of development planning and the enormous volume of financing made available for the reconstruction of Europe and Japan after the ravages of the Second World War. Table I.1 DISPARITIES BETWEEN THE WORLD S REGIONS, A. Per capita output, by region a Western Europe Australia, Canada, New Zealand and United States Japan Asia (except Japan) Latin America Eastern Europe and former Soviet Union Africa World B. Inter-regional disparities (percentages) Least developed region/most developed region Latin America/most developed region Latin America/world Latin America/least developed region C. Share of global output (percentages) Western Europe Australia, Canada, New Zealand and United States Japan Asia (except Japan) Latin America Eastern Europe and former Soviet Union Africa World Source: a Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of J.A. Ocampo and J. Martin, Globalization and development: A Latin American and Caribbean Perspective, Palo Alto, Stanford University Press, 2003; and A. Maddison, Contours of the World Economy AD: Essays in Macro-Economic History, Oxford, Oxford University Press, In 1990 PPP (purchasing power parity) dollars. 20

19 CHAPTER I LATIN AMERICA AND THE CARIBBEAN IN THE WORLD: TRENDS AND OPPORTUNITIES Table I.2 CONVERGENCE AND DIVERGENCE IN PER CAPITA OUTPUT, BY REGION, a OECD European Union (15 countries) Developing countries Latin America and Caribbean Transition economies World Source: a Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of A. Maddison, Contours of the World Economy AD: Essays in Macro-Economic History, Oxford, Oxford University Press, Standard deviation of the logarithm of per capita output. Secondly, attention should be drawn to the marked differentiation produced in the developing world by the emergence of Asia, which has been playing a greater and greater role in the world economy. Per capita output growth in Japan since the 1950s, in the so-called Asian tigers since the 1970s and in other countries of the region in recent years, most especially China since the 1980s and India since 1990, has made a decisive contribution to this. Since 1980, therefore, there has been divergence between a growing group of Asian countries and all other developing countries. Combined with the differences in population size and dynamics between the different regions of the world, these variations in per capita output growth have substantially altered the distribution of world output (see table I.1, section C). In the nineteenth century, the most salient feature was the preponderance of western Europe and the western offspring (Australia, Canada, New Zealand and the United States) at the expense of Asia. 5 More recent times have seen the consolidation of a third hub in Asia whose share of world output, if Japan is included, has overtaken that of Western Europe and the western offspring combined thanks to its concentration of manufacturing activity, thereby creating a third dynamic axis of contemporary capitalism. A decisive element in the emergence of this third hub in Asia is the nature of technological change, which has led to the fragmentation of production and its reorganization into global value chains (see section C) and a large increase in the integration of production and thus trade in Asia. In relative terms, indeed, the intraregional portion of Asia s trade exceeds that of the North American Free Trade Agreement (NAFTA) countries and is approaching the European Union level (see table I.3). Furthermore, the intraregional trade intensity index, which takes the size of each region s markets into account, reveals that in 2006 intensity was higher in Asia (2.3) than in Europe (1.7), and was very close to the NAFTA level. 6 Thus, not only do these three hubs between them account for an extremely large percentage of world output and technological change, but each of them has a high degree of internal production complementarity. At the same time, there is a large amount of trade and investment between them. The rest of the world has to contend with solid barriers to entry, owing to two main factors. First, there are economies of agglomeration which accentuate the tendency for innovation and technological learning to become concentrated in a limited number of places where a range of technology-related capabilities are to be found together (Lall, 2003). Second, technological innovations are path-dependent, i.e., innovations tend to spring from the capabilities that already exist in particular locations (Farfán, 2005). The concentration of research and development 5 6 The term western offspring was coined by Maddison (2001) to denote the group of countries comprising Australia, Canada, New Zealand and the United States of America. This index is the ratio between the respective shares of intraregional trade and world trade in the region concerned, based on export figures. A higher ratio indicates a greater dependency on intraregional trade (ECLAC, 2007a). 21

20 STRUCTURAL CHANGE AND PRODUCTIVITY GROWTH 20 YEARS LATER. OLD PROBLEMS, NEW OPPORTUNITIES ECLAC spending in the three hubs is very high, exceeding 90% of the world total, as figure I.1 shows. Between and , Asia and the Pacific increased their share at the expense of the European Union, most particularly owing to higher spending in China, whose share rose by almost 5% between the two periods. Table I.3 INTRAREGIONAL TRADE, BY GEOGRAPHICAL GROUPING a (Percentage of the region's total trade) Region Asean+3+2 (15) b European Union (27) NAFTA (3) Source: a b Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the United Nations Commodity Trade Statistics Database (COMTRADE). The intraregional trade share is the percentage of the region s total trade represented by intraregional trade, measured using export data. It is calculated as follows: Xii/[(Xiw+Xwi)/2], where Xii are the exports of region i to that same region, Xiw are the exports of region i to the world and Xwi are the exports of the world to region i. ASEAN+3+2 includes the 10 countries of ASEAN plus China, Japan and the Republic of Korea, plus Hong Kong (SAR of China) and Taiwan Province of China. Figure I.1 DISTRIBUTION OF RESEARCH AND DEVELOPMENT SPENDING, BY REGION (Percentages) US$ 520 billion US$ 740 billion NAFTA European Union Asia and the Pacific Latin America Rest of world Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the United Nations Educational, Scientific and Cultural Organization (UNESCO); Ibero-American Network of Science and Technology Indicators (RICYT); and Organisation for Economic Co-operation and Development (OECD), Main Science and Technology Indicators, Paris, various years. This has clear consequences for other developing countries, which tend to be left out of this system of innovation and growing productive integration. Furthermore, they are penalized by the hubs tariff structures and other protection mechanisms as these are unfavourable to commodities, particularly more highly processed ones, which are directly affected by tariff escalation (ECLAC, 2006a). This is compounded by substantial differences in financing costs and access between the hubs and the rest of the world. To complete this overview, two further considerations should be mentioned. First, economic growth successes and collapses in developing countries tend to group into specific periods. This means that the global development cycle affects the medium-term performance of 22