The Age of Productivity

Most countries in Latin America and the Caribbean have been growing slowly for a long time and consider themselves increasingly poor relative to the rest of the world, including both advanced countries and peer countries in other regions. Actual declines in income per capita for substantial periods of time have been common. However, it would be misleading to blame low investment for this failure. Low and slow productivity, as opposed to impediments to factor accumulation, is the key to understanding Latin America’s low income relative to developed economies and its stagnation relative to other developing countries that are catching up. A fortiori, the main development policy challenge in the region is to diagnose the causes of poor productivity and attack their roots. This chapter documents the key dimensions of weak productivity at the aggregate level in an analytical framework that helps this diagnosis, and in that way provides a basis for the rest of the book. It draws heavily from Daude and Fernandez-Arias (2009), where the statistical and technical details are spelled out.

Since at least the 1950s, scholars have viewed development as a process of progressive transformation: economies based predominantly on traditional sectors, with “tradition” equated with agriculture, evolve toward economies dominated by modern sectors, often associated with industry¹ This process of transformation is prompted by gains in agricultural productivity, which in turn encourages increasing numbers of agricultural workers to migrate to industries with higher productivity. Understanding shifting patterns across sectors, as well as the evolution of productivity within sectors, can yield important clues about the determinants of aggregate productivity.

An economy without credit is like a car without fuel: it simply cannot move forward. There is abundant evidence that credit is an important driver of economic growth.¹ At the most basic level, credit is the mechanism through which savers in the economy connect to borrowers, enabling them to carry out investment projects that are the basis for the process of capital accumulation. But credit does not only foster economic growth through investment. Credit also promotes productivity growth in a number of ways. Indeed, the “productivity channel” through which credit impacts economic growth is an amply studied mechanism.²

This book focuses on productive development policies (PDPs) that improve the economy’s aggregate productivity, be it directly through firms’ productivity or by facilitating a more productive allocation of factors of production. As defined by Melo and RodrÞguez-Clare (2006): “Productive development policies can be broadly defined as policies that aim to strengthen the productive structure of a particular national economy” This is evidently a very broad definition, including polices aimed at certain key markets or activities (such as research and development [R&D], exports, human-capital formation) in large sectors of the economy (manufacturing, agriculture) and in specific sectors (textiles, automobile industry, software production, etc.). Previous chapters reviewed a number of PDPs aimed at addressing failures in certain markets or economic activities; these are called “horizontal” PDPs, because they cut across economic sectors and clusters. This chapter covers “vertical” PDPs and is therefore concerned with policies directed to specific sectors and clusters. For short, vertical PDPs are termed industrial policies because they are PDPs specific to certain “industries,” which are taken to mean sectors or clusters of economic activity. Note that industrial policies refer to any set of related private producers, not just manufacturing.