Designing Industrial Policy in Latin America: Business-State Relations and the New Developmentalism

Business-State Relations and the New Developmentalism

B. Schneider

• Publisher: Palgrave Pivot
• Year: 2015
• ISBN:
  9781137524843
• Topic: Economía
• Subtopic: Política económica

Development economists and practitioners agree that close collaboration between business and government improves industrial policy, yet little research exists on how best to organize that. This book examines three necessary functions–-information exchange, authoritative allocation, and reducing rent seeking–-across experiences in Latin America.

1

Introduction: Institutional Dynamics of Industrial Policy

Schneider, Ben Ross. Designing Industrial Policy in Latin America: Business-State Relations and the New Developmentalism. New York: Palgrave Macmillan, 2015. DOI: 10.1057/9781137524843.0003.

For a while it appeared that industrial policy had died and been buried along with the 20th century. However, by the mid 2000s, it was, zombie-like, back.¹ Early sporadic debates started among some academics, in a few multilateral agencies in Washington, and in some policy making bodies in Latin America and other developing regions. The reasons for the revival were diverse, ranging from dismay at the results of market reforms in the 1990s, to the surprising success of left-wing parties, to ongoing tinkering and pragmatism among officials in surviving development agencies, and the new developmentalism in the region (Ban 2013). The financial crisis of 2008–10 reinforced statist proclivities across the globe and gave new respectability to the interventionist BRIC model.

Economists who came to advocate, or at least accept, a new role for industrial policy were quick to point out that a key risk (that contributed to its demise in the 1990s) was still that policy makers lacked the information necessary to design effective interventions. This was true in the simpler 20th century and ever more so in the 21st. In Latin America, ongoing development, globalization, and integration into the international economy rendered the challenges of state intervention into the private economy through industrial policy ever more complex, delicate, and information intensive.

The solution proposed by many to managing these informational and other complexities was more intricate, intensive, and continuous contact between government officials and business people.² Rodrik (2007, 100) argued that “the task of industrial policy is as much about eliciting information from the private sector . . . as it is about implementing appropriate policies.” In his analysis of new export activity and self discovery in Latin America, Sabel (2012) argues that the key to success is coordination both among private producers and between public and private actors. In their review of ten successful, late developers outside Latin America, Devlin and Morguillansky (2011, 4) argue that their strategies are “not a creation of the central government alone but instead arise out of public–private alliances.” Similarly, Ornston (2012) argues that dynamic forms of corporatism (tripartite arrangements among business, labor, and government) explain the recent high tech successes of Ireland, Finland, Denmark, Sweden, and Korea.³

The theoretical and practical implications are that policy analysis should pay more attention to business and that research needs to look beyond the quality of policy and the quality of the agencies of government making policy to examine in greater depth the nature of relations between public and private actors (Rodrik 2007). Hausmann, Rodrik, and Sabel go so far as to define effective industrial policy as process rather than outcome: “we take ‘good’ industrial policy to consist of those institutional arrangements and practices that organize this collaboration [between public and private sectors] effectively” (2007, 4). Yet, while many scholars agree that business-government collaboration is imperative, few delve deeply into the specific institutions best suited to promote it (see Devlin and Moguillansky 2011).

The institutional challenges are formidable. First, governments need to establish appropriate forums or councils for dialogue between representatives of business and government. Moreover, effective dialogue depends on well-organized business interlocutors. For most policy areas, not all businesses can participate in the discussions, so the organization of business, both formal and informal, is crucial for effective representation. And, even if appropriate micro institutions for business representation and business-government dialogue exist, their functioning depends heavily on the overall political environment. If some businesses can by-pass associations and business-government forums to change policies, then the associations and councils lose credibility and other businesses are likely to defect (Eslava, Meléndez, and Perry 2012). On this macro level, many institutions and practices matter for business politics, but a minimum list would include parties, legislatures, campaign finance, personal networks, and lobbying.

On the challenge of designing appropriate forums or councils for effective business-government dialogue, a number of authors have put forward lists of institutional and other desiderata. In a practitioners’ guide, Herzberg and Wright focus on “six key factors in setting up and running a competitiveness partnership: ignition, organizing participation, structure, setting and reaching goals, the role of donors, and communications strategy” (2005, 10). Machinea et al., list a dozen “principles” that should guide “public–private alliances” (2008, chapter 6). Devlin and Morguillansky provide a full list of more than a dozen factors that facilitate public–private alliances (2011, 88–90). This book also reviews a fairly long list of optimal institutional features. However, effective business-government collaboration is both simpler to establish—and more complex to sustain—than these lists imply.

To simplify the challenge of facilitating first steps in public–private collaboration, it is useful to think of general functions, three in particular—real information exchange between business and government, allocative authority, and barriers to rent seeking. The actual institutions and organizations used to achieve these three functions are many and can vary from case to case.⁴ The important analytic task—when assessing any particular case—is to sort out which institutional components are really essential to these three general functions. When analyzing dynamics over time, effective collaboration is also more complex than the institutional desiderata imply. That is, collaboration may start with one institutional arrangement but evolve over time into new configurations by adding staff, restricting participation, devolving responsibilities to new forums or working groups, and so forth. Apt metaphors are better drawn from evolving biological systems than from one shot chemical reactions.

For purposes of understanding the institutional challenges of public–private collaboration, it is crucial to distinguish between passive and active industrial policy. Passive policies seek to change the public sector (such as red tape, infrastructural bottlenecks, and other items on the World Bank’s Doing Business survey) to reduce costs for business on the assumption that these changes will improve business performance. Active policies, in contrast, target deeper changes in the private sector, in firm behavior (e.g., exports, upgrading, or technological development) and rely on direct subsidies from the state. In targeting substantive changes in business behavior, active policies establish performance standards and thus require monitoring and sanctioning capacity—a coercive side to industrial policy that is often neglected in the current revival of interest.⁵ These distinctions are developed further later. The point for now is to emphasize that the institutional challenges for passive policy are much less daunting than for active policy. The distinction is also crucial because many recent instances of business-government collaboration in Latin America revolved around competitiveness councils that focus on passive policies.

Many studies and advocates also argue that public–private collaboration requires strong political will and backing from the highest levels (Rodrik 2007, 113; Suzigan and Furtado 2006). This is certainly true if the country is going through major, contentious transitions in the overall development strategy. However, many successful examples of effective business-government collaboration occurred out of the lime light at lower levels, even subnational or in specific sectors, without much top level support. Any transfer of significant allocative authority (such as subsidies or favorable regulation) —one of the three essential functions—requires some measure of political support, but once established, the flow of resources may itself create a sufficient support coalition to keep the dialogue going without recurring infusions of political will from the top.

Appeals to political will and leadership also side step what should be an integral component of any analysis of industrial policy—prospective or retrospective—namely how it fits in the larger political context. Optimally designed policies and associated business-government councils cannot progress much if they do not fit with existing political institutions (electoral, legislative, etc.) and organization of powerful social groups (parties, associations, and networks). Political leadership or political will cannot help much without taking into consideration existing constellations of institutions and organizations. Moreover, given the privileged position of big businesses in most political systems, their structures, preferences, and capabilities merit special attention in any macro-political analysis.

The rest of this book takes the following form. Chapter 2 analyzes the main micro, institutional mechanisms of business-government councils concentrating on three key functions: meaningful information exchange, authoritative allocation, and minimized rent seeking. The list of contributing elements of institutional design is longer, including small numbers of participants, off-the-record discussions, frequent meetings, adequate technical staff, transparent decisions, peer monitoring, and so forth. However, these design components can be combined in different and often evolving ways to fulfill the three core functions. Chapter 2 also includes a brief review of the Korean “model” where business-government councils were crucial elements of take-off growth in the 1960s and 1970s and continued to steer technology policy in recent decades.

Chapter 3 covers a range of successful empirical examples in Latin America, organized in part by the scope of business-government collaboration. The goal is to summarize a variety of cases in recent decades that illustrate the wide range of institutional arrangements for promoting collaboration. In contrast to other reviews of broad national strategy (Machinea 2008; Devlin and Moguillansky 2011), Chapter 3 analyzes cases in particular sectors and provinces. Given contemporary complexities in the new developmentalism, many of the most promising opportunities for industrial policy may arise in these narrower, decentralized arenas (Block 2011). The empirical material comes largely from secondary sources, reports, government documents, and periodicals, but also incorporates several dozen personal interviews.

Chapter 4 turns to the macro context, especially the politics and structure of big business. The chapter delves into the formal institutions—electoral and party systems—and informal practices in Latin America that favor policy influence by big business and encourage individual over collective lobbying. From a comparative, historical perspective, contemporary developmental states in Latin America are weaker vis-à-vis business than earlier incarnations in authoritarian regimes with less-developed private sectors (Schrank 2013a). Policy makers in new democracies in Latin America are more constrained, and in this context then the base-line preferences of big business matter more for establishing limits on, and opportunities for, effective collaboration in policy making.

Most recent analyses of industrial policy—even while advocating business-government collaboration—neglect existing firms, especially the diversified business groups and MNCs that dominate big business in most developing countries. This chapter argues instead that the design of industrial policy needs to take into account patterns of business politics and the strategies and capabilities of large firms. Although both business groups and MNCs may oppose the imposition of active industrial policy, some measures may in principle be able to harness natural strategies of business groups to diversify or push negotiations with MNCs over the kinds of performance standards they accepted in other countries.

What, in summary, does this book add to the recent spate of books on industrial policy listed in the bibliography? In essence, this book fills in the institutional dimension that other studies repeatedly invoke but rarely really analyze. Moreover, the approach here simplifies the institutional analysis of business-government collaboration and grounds it in a wealth of new empirical material from Latin America. Most importantly, the book brings in the politics and actual existing business actors that are almost completely absent from the recent spate. This last lacuna is especially puzzling. Nearly every publication on industrial policy makes extensive reference to business and the private sector, but in the abstract without mention of any specific firms. Yet, the design of industrial policies clearly has to factor in whether the target is small start-ups or huge conglomerates. The contextual analysis should therefore start with the size, structure, capabilities, and politics of existing firms.

1For brief histories of the debate, see Stiglitz, Lin, and Monga 2013; Agosin 2013. Industrial policy is commonly understood to be any government intervention designed to favor some sectors or activities over others (in any area of the economy, not just industry)

2Among other recent studies, including major reports from nearly every development multilateral agency, see Devlin and Moguillansky 2011; Coutinho, Ferraz, et al. 2012; Machinea 2008; Suzigan and Furtado 2006; OECD 2013; Maloney and Perry 2005a, 36; Kuznetsov and Dahlman 2008, 112; Sabel 2009; Crespi, Fernández-Arias, and Stein 2014. Hausmann (2009) in particular emphasizes the need for a “complex policy framework” and “high bandwidth development policy.

3Outside industrial policy, Culpepper (2002) argues that information exchange was a crucial part of business-government (and labor) dialogue over reforms to pensions and vocational education in Europe

4In a sense, councils are designed to correct for what Schrank and Whitford (2011) call network failure. Although they apply the concept mostly to relations among firms and other economic agents, it can also be usefully applied to relations between business and government. For Schrank and Whitford, key issues in network failure are competence and confidence which could map on to the issues here of information and rent seeking. Later chapters bring informal networks in as they affect the functioning of formal councils

5Although not concerned with coercion, Crespi et al. (2014, Chapter 2) offer a more nuanced set of conceptual distinctions that contrast vertical/horizontal policies and public inputs/market interventions. Vertical, market interventions are, like active policy, the most risky and prone to rent seeking. However, what is missing in this conception is the fact that policies in this quadrant are intervening in firms (not just markets) and therefore require clear performance standards and monitoring

2

Principles of Institutional Design in Business-Government Councils

Schneider, Ben Ross. Designing Industrial Policy in Latin America: Business-State Relations and the New Developmentalism. New York: Palgrave Macmillan, 2015. DOI: 10.1057/9781137524843.0004.

I Introduction

Outside Latin America, business-government councils are widespread and regularly associated with accelerated development. High growth Asian economies such as Korea, Taiwan, and Singapore were rife with business-government councils (Campos and Root 1996), and section III reports on the continuing centrality of business-government councils in contemporary technology policy in Korea.¹ In Japan, over 200 consultative councils (shingikai) “deliberate and report on every conceivable area of public policy” (Schwartz 1992, 218). Some councils dated from the early 20th century, but most, ironically, were imposed by the US occupation that created the framework legislation for councils in order to constrain the bureaucracy and make it more accountable. These councils performed important functions in reconciling divergent interests, coordinating expec...

Table of contents

• Cover
• Title
• 1  Introduction: Institutional Dynamics of Industrial Policy
• 2  Principles of Institutional Design in Business-Government Councils
• 3  Ongoing Experimentation with Business-Government Councils in Latin America
• 4  Putting Councils and Industrial Policy into Context: Political Systems and Big Business
• 5  Conclusions
• Appendices
• Bibliography
• Index