Cycles of Creation and Destruction of Production and Technological Capabilities in Latin America (Jorge Katz)


For more than three decades now Latin American countries have introduced market oriented structural reforms, opening up their economies to foreign competition, de-regulating markets, and privatising economic activities. These policy reforms involved a major departure from the policy regime that prevailed in the region during the immediate post war period. The new policies –together with the rapid process of globalisation of the world economy that obtained throughout the 1990’s– induced a major transformation of the social, economic and institutional environment of each one of the countries in the region, as a result of which Latin American economies have undergone major changes in production structure, international competitiveness, institutions and technological capabilities.

Modern Growth Theory is not particularly well equipped for these issues. Said theory is specified in terms of an equilibrium algorithm, in which changes in institutions and in the structure of the economy, macro-to-micro interactions, the co-evolution of economic, institutional and technological forces and the process of creation and destruction of institutional and technological capabilities that obtains during the process of economic development can not be adequately studied. New sectors of economic activity have emerged in Latin America during the 1990’s, while many ‘old’ activities have been gradually phased out. Labour expulsion has taken place
both from manufacturing and agriculture. Open unemployment and informality have increased in most countries in the region. Different forms of capital intensive, computer-based production technologies have been brought on board by the larger firms in the economy displacing ‘old’ – more labour intensive - technologies and forms of production organization. ´Large´ firms have managed to reduce their degree of vertical integration and rely now more strongly on external outsourcing, both of production technology as well as of intermediate parts and components. On the other hand, as a result of imperfect access to local capital markets or due to insufficient ´in house´ technological capabilities, most SMEs have not adapted well to the new rules of the game and have lagged behind in terms of technological and organizational upgrading. Thousands of them were forced to exit the market during the adjustment process - estimates being that around 8 thousand SMEs closed down in Chile and more than 12 thousand did so in Argentina during the 1980´s. The large majority of those that remained in business found themselves lagging
behind ‘large’ firms as far as productivity growth and innovation are concerned.

After long years of market-oriented reforms, average labour productivity in Latin America continues to be in the range of 20-50% of that attained by the US, with Argentina and Chile in the upper part of the spectrum, and Ecuador, Paraguay and Bolivia in the lower one. On the other hand, the labour productivity gap between ´large´ and ´small´ firms in the economy has increased sharply in the course of time. Summarizing: market-oriented reforms and the process of globalization of the world economy triggered off a major process of institutional and technological transformation throughout Latin America. The nature of competition has changed dramatically in most production activities, with business concentration and foreign ownership having expanded fast in many industries. External sources of technology and production know how have gained prominence in the production structure while domestic knowledge-generation activities and national innovation systems have remained frail and still mostly uncoordinated pieces of social machinery, scarcely significant at the time of supporting local innovation efforts and the inception of new production activities and technologies in the economy. Even though the reforms have not delivered what was a priori expected from them in terms of an across-the-board process of economic upgrading it is nevertheless true that in each and every country in the region a (small) modern sector of economic activity has been erected as a result of the change in policy regime. Such sector covers, say, 40% of GDP in the richest countries in the region, and not much more than 10% in the poorest ones. It includes new production activities which were not present just a few years back (or were performed using less modern production technologies), including: a) natural resource processing industries which have now incorporated ´state-of-the-art´ technologies – such as genetically modified soy beans and vegetable oil production in Argentina, pulp and paper production and salmon farming in Chile, fresh flowers in Colombia, and many others. b) high productivity service industries including banks, telecoms, energy and tourism; and c) a few technology intensive manufacturing activities, such as airplanes design and construction in Brazil (A.Goldstein, 2005), or the assembly - in ´state-of-the-art´ plants, relying mostly on imported parts and components as well as on foreign-designed production organization routines - of vehicles and electronic equipment in Mexico.

The (small) fraction of society that belongs in the modern part of the economy is paid well above average and has gradually developed consumption patterns comparable to those exhibited by the large majority of the citizens in more developed industrial nations. For the individuals belonging in this segment of society the question as to whether or not ‘convergence’ with more developed industrial countries will ever take place constitutes a rhetoric question, insofar as their life style is indeed quite similar (and in many cases better) to the one attained by the average citizen of, say, Spain or Italy. On the other hand, however, deeper and more intractable forms of social and economic exclusion have emerged in society, higher levels of informality now prevail, and more vindictive social relations -resulting from a growing climate of frustration and despair – have become widespread in most countries, making political governance increasingly difficult to attain.

Working Paper