## Online Annex 3. Industrial Policy in Latin America

## Source details

**Canonical URL:** [Online Annex 3. Industrial Policy in Latin America](https://www.imf.org/-/media/files/publications/reo/whd/2024/october/english/onlineannex3.pdf)

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- [Markdown version](/-/media/files/publications/reo/whd/2024/october/english/onlineannex3.pdf.md)
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### Overview
- Industrial policy (IP) is defined as government interventions aimed at supporting specific domestic firms, industries, or narrowly defined economic activities to achieve certain national economic or non-economic objectives.
- IP has reemerged in policy toolkits amid geopolitical tensions and the aftermath of the COVID crisis.

### Measurement and Recent Trends
- During 2009–23, the average LAC country introduced around 2,000 trade-distortive policies.
- The average across LA5 countries (Brazil, Chile, Colombia, Mexico, and Peru) has been [somewhat] higher.
- The number of trade-distortive policies in the region was larger than in other EMDEs and AEs until 2015, has grown less rapidly since then, and is lower than in other countries as of 2023.
- Around half of the trade-distortive policies in force in LAC as of 2023 are import restrictions and local content requirements and the other half are subsidies.
- Local content requirements account for one third of all trade-distortive policies over time in LAC, in contrast with other emerging market economies where subsidies are the most common tool.

### Motives for New Industrial Policies (2023)
- Data from the New Industrial Policy Observatory (NIPO):
  - 67 percent of IPs in LAC implemented in 2023 are motivated by strategic competitiveness.
  - 57 percent is the corresponding share for other emerging markets.
- The Annex notes that non-economic policy objectives such as national security and geopolitical concerns are absent in the region’s 2023 IPs, whereas in other countries significant shares of IPs are motivated by these reasons.

### Historical Context and Risks
- State-led industrialization in the 1970s and 1980s, amid macroeconomic instability, produced poor productivity growth and little diversification away from volatile primary sectors.
- After a retreat of IP in the 1990s, governments in the region returned to milder forms of intervention with mixed results.
- Risks from IP include inefficiencies due to resource misallocation, rent seeking, distortion of domestic resource allocation, and retaliatory policies from trading partners that can damage international trade and investment flows.

### The Dos and Don’ts (Policy Guidance)
- General principle: IP support—if needed—should be time-bound, cost-effective, transparent, and consistent with preserving domestic macroeconomic stability, fiscal and external sustainability, and avoiding negative cross-border spillovers.
- Specific considerations adapted from IMF (2024):
  - The case for targeted government intervention should be clearly established.
    - IP measures should aim at addressing well-identified market failures that cannot be addressed through alternative policies, including less-distortionary horizontal policies such as investments in infrastructure, R&D, and human capital.
  - IP should be well designed.
    - Choice of policy instruments should be consistent with the country’s institutional framework and implementation capacity.
    - Effective IP implementation should be complemented by economy-wide policies (for example, IP targeting the high-tech sector may benefit from appropriate education, labor market, and possibly immigration policies).
  - IP should be underpinned by a governance framework that reduces risks of rent-seeking and corruption.
    - This includes transparent mechanisms for allocating resources, regular monitoring and assessment of support provided, and clearly defined sunset clauses to ensure IP support is temporary and gradually phased out.
  - The benefits of addressing market failure through IP should outweigh the costs.
    - Cost-benefit analysis should capture direct and indirect benefits and costs for the domestic economy, including fiscal and administrative costs, contingent liabilities, and indirect costs due to resource misallocation, and should include effects of cross-border spillovers and spillbacks.
  - Implementing IP should be compatible with fiscal sustainability as well as with external and domestic stability.
    - Countries should have adequate capacity to implement such measures, which should be consistent with the country’s legal obligations, including WTO commitments.

### Key Findings and Statistics
- Average number of trade-distortive policies introduced by the average LAC country during 2009–23: around 2,000.
- Share of LAC IPs in 2023 motivated by strategic competitiveness: 67 percent.
- Share of IPs in other emerging markets in 2023 motivated by strategic competitiveness: 57 percent.
- Share of trade-distortive policies in LAC that are local content requirements over time: one third.
- Composition of trade-distortive policies in LAC as of 2023: roughly half import restrictions and local content requirements, and half subsidies.

*Prepared by Oliver Exton, Adam Jakubik, Sergio L. Rodriguez, and Lorenzo Rotunno.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2024/october/english/onlineannex3.pdf_