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

30 years latter … 30 years latter … Total Export Growth (millions of US current dollars)

30 years latter … 30 years latter … Diversification of Exports

After 30 years Challenges 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 … 30 years latter … Trade Balance (million $US)

Weakenesses in the Model (5) FDI has an important macroeconomic impact Balances trade balance at an average of 98% and generates well payed jobs BUT… 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 year Between : – 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!