With falling commodity prices, Colombia and Peru must focus on industry

With falling commodity prices, Colombia and Peru must focus on industry

Industrial policy remains a secondary issue for policymakers in Colombia and Peru, two Andean countries that strongly benefited from the 2000s commodity boom. They need to revise that prioritization.

Academics and experts have divided Latin American markets into the regulated economies facing the Atlantic Ocean i.e., Venezuela, Brazil, and Argentina, and the open economies facing the Pacific Ocean i.e., Colombia, Peru, Mexico, Costa Rica, and Chile.

Many have touted the latter group as an emerging economic bloc because of their formal commitment to regional integration as well as trade and financial liberalization through the formation of the Pacific Alliance trade bloc. Indeed, the governments composing the Pacific Alliance have done well in seeking regional integration and further liberalizing their markets in a timely manner.

However, investors should note that two Andean members of the Pacific Alliance, Colombia and Peru, suffer from underdeveloped industrial capacity. Even Chile, arguably the strongest economy in Latin America, has a weaker manufacturing base than regional competitors such as Argentina, Brazil, and Mexico.

Choosing an open market model is one part of a 21st century development trajectory. The other part requires governments to partner with industrial interests to create a competitive manufacturing sector. This is an opportune time for Colombia and Peru to heavily invest in manufacturing.

As the commodity boom comes to an end and the region’s primary sector slows down, these two hot markets need to find alternative ways to sustain growth rates and capital inflow. With a lagging primary sector, dated infrastructure, and little manufacturing industry, policymakers in Bogota and Lima need to prioritize preparing the leap from a commodity based economy to industrial development.

Industrial policy in these two countries has not changed in decades. In 1996, ECLAC (Economic Commission for Latin America and the Caribbean) advised Latin American governments to fortify “the institutional framework for the development of production activity” to push Latin America towards industrialization. 18 years after ECLAC’s proposal, industrial policy has changed minimally and the manufacturing sector remains underdeveloped.

For the most part, it seems that policymakers have ignored building the long-term industrial capacity of their respective countries. Five or ten years ago, the Colombian and Peruvian governments could afford to put off industrial modernization, as gold, iron, aluminum, and copper ore prices were peaking. 2014 presents a very different situation—commodity prices have fallen by a quarter from their level of 2011, dropping more than those of foodstuffs.

Yet, despite falling commodity prices since 2011 and falling investment, Peruvian and Colombian policymakers alike have remained hesitant to modernize industry. In Peru, policymakers are still focused on growing their mining activities by awarding lucrative contracts to multinational corporations.

It is not surprising that Peru is still hung up on the primary sector—in the past decade, Peru has become a world leader in gold, zinc, and copper extraction. The growth of the Peruvian primary sector since the early 2000s makes it difficult for the President’s cabinet—which mostly represents mining and business interests—to detract from its current set of extraction-friendly policies.

In Colombia, the political scene is currently dominated by the FARC peace process and the upcoming presidential elections. Industrial policy in Colombia has also been ignored because of institutional factors. The institutional arrangement on which productive development policies (PDPs) are adopted in Colombia is quasi-formal and is based on a public-private partnership.

This means that even if the government decides to develop strategic industries like the East Asian tigers four decades ago, they run a high risk of facing insurmountable pressure by private interests. In a sense, particular interests that would lose out from industrialization hold veto power, which provides disincentives for proposing a discussion about industrial reform at the national level.

Leaders in both Colombia and Peru have detracted from focusing on much needed productive development policies for two reasons. First, they are distracted by the easy money that is still trickling in from extractive industries, despite lower commodity prices. Secondly, they are probably frightened of losing the support of mining and other primary sector export-oriented interests, any of which can stop funding electoral campaigns if a major party seriously considered partnering with minor manufacturing interests. The plural institutions governing in Colombia and Peru have allowed for advocacy groups representing extractive industries to thrive and secure local and national power.

Industrial policy in the Andean corridor would not be an issue of discussion if copper, aluminum, coal, iron, and gold prices were soaring as they were a decade ago. Unfortunately, commodity prices are coming down and these countries are left vulnerable to economic stagnation and growth patterns resembling the forgettable levels of the 1990’s. Policymakers in Colombia and Peru, however, seem to have made up their minds about significantly investing in manufacturing.

Government-sponsored manufacturing ventures remind the electorate of import substitution industrialization and interventionism, which may be politically costly. Public financing of industrialization also poses an additional burden on relatively fragile state budgets.

Government funding of manufacturing may also represent an unpopular commitment for policymakers in Colombia and Peru because they have spent the past fifteen years passing legislation to open up their economies to trade and investment, which makes foreign products cheaper. Purchasing high-technology products has become very cheap for Peru and Colombia because of trade agreements with the United States, Europe, and important Asian countries.

It should be noted that if Colombia and Peru want to build a developed manufacturing base and upgrade their infrastructure, they will have to push it with public funds and fiscal incentives. If the private sector has not stepped in to industrialize 30 years after the introduction of the modern liberal capitalist system, it is unlikely that it will do so now.

Categories: Economics, Latin America

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.