Originally published in El Pais
The Latin America and Caribbean (LAC) region is questioning its economic model. At the Spring Meetings of the World Bank and IMF the message was clear: Growth is forecasted to remain lackluster, at 1.6% for 2024 and 2-2.5% going forward, too low to reduce poverty and make people better off. Governments very reasonably are asking for a second opinion.
This questioning coincides with new thinking that calls for a more active role of the state to end this ongoing stagnation, sometimes grouped together as “industrial policies.” As countries explore and assess different solutions, it is essential to keep in mind key lessons from previous experience, most particularly the urgent need to increase investment in people and institutions.
First, maintaining the region’s hard won fiscal balance and macro-economic stability is the sine quo non for any growth strategy. No novel approach is exempt from the now accepted laws of fiscal gravity.
Second, standard economic analysis still provides a well understood framework and language shared across the region that facilitates and disciplines the policy debate. It underpins the work of new industrial policy advocates such as Harvard’s Dani Rodrik and Nobel prize winner Joseph Stiglitz, as well as the World Bank’s and IDB’s work on productivity policies. It can also justify supporting initiatives like the Defense Advanced Research Projects Agency (DARPA) or the National Science Foundation (NSF) in the United States, which are exemplified as best practices in Mariana Mazzucato's "Mission Economy" strategy, an approach inspired by the Apollo space program.
Third, new policy experiments need to be private sector oriented. State-directed interventions cannot substitute for the broad-based experimentation with new products and technologies by the private sector that underpins modern dynamic economies. At the same time, firms need to be prodded toward greater productivity, strengthening domestic competition, insuring global competition or, having state support credibly conditional on, for instance, export success, as in Asia.
Fourth, and perhaps most critically, the success of any strategy fundamentally depends on the capabilities of people and institutions. Borrowing Mazzucato’s analogy, the original Apollo moonshot success depended on raising the quality of the “astronauts” (the private sector and supporting institutions) and “mission control” (the state). Physical science and engineering Ph. Ds more than tripled in the decade after the US announced its mission; government promoted technical skills and science and mathematics in school curricula. The Asian Miracles have followed this path.
LAC has not. The shortfall in skills and knowledge institutions likely explains why dynamic and diversified growth has remained elusive even among established markets and industries. Latin America was not able to leverage mining, its centuries old industry leader, into diversified, dynamic economies as the US or Japan did. Similarly, while foreign direct investment and reshoring may have the potential to transform an economy’s structure, it is not automatic. Mexico has produced electronics for decades. But unlike Asia, no Indigenous industry leaders have emerged.
LAC’s astronauts remain grounded by weak capabilities. Only a third of 15-year-olds meet minimum standards in science and mathematics. Worker training programs often fail to provide what employers need. Regional universities do not place among the top 100 of the world, graduate relatively few engineers and scientists, and are tied with Africa for last place in working with the private sector. Managerial skills in LAC lag advanced countries. This shortfall in capable entrepreneurs, scientists, and workers, along with the still pending reforms of infrastructure, finance, and regulatory and competition structures make it hard to see how any growth policy, neo-liberal or interventionist will achieve sustained lift off.
Finally, we need to be honest about what “mission control” is capable of. The World Bank is committed to strengthening governance. But we must be realistic about how good public sectors are at designing policies, implementing them, and resisting lobbying. These qualities are essential for any complex initiative to succeed. The long-standing concern with active policies remains that governments will lack the omniscience or independence required to pick promising sectors or design and implement missions. Hence the preference among many economists for more “horizontal” interventions such as skills or infrastructure, which benefit many sectors.
But an equally great risk is that governments will see the new generation of industrial policies as a respite from the hard lessons learned over the last 50 years and a short cut around the difficult reforms to build the capabilities and institutions needed. Preparing our astronauts and mission control to pilot 21st century growth is LAC’s necessary moonshot.
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