Carlota Perez

1. THE NEW CONTEXT FOR DEVELOPMENTAROUND NATURAL RESOURCES: An opportunity for Latin America(and other resource rich countries)? Carlota Perez Centennial Professor at the London School of Economics (LSE), UK Professor of Technology and Development, Tallinn University of Technology, Estonia JICA/IPD, Jordan, May 2014

2. BASIC ARGUMENT: Circumstances have significantly changedsince our ideas on development evolvedin the post-war period In the character of energy, materials and food markets In the potential for innovation in developing countries In the interests and behavior of global corporations In the influence of environmental factors asboth obstacle and challenge And in the level of awareness of the role of innovation in growth and development

3. A historical observation: Fast growth and catching up processes tend to cluster in certain regions or countries that move in similar directions for a certain period What determines the synchronicity? Development opportunities are a moving targetdepending on the nature ofsuccessive technological revolutionsand on their stage of diffusion It’s no use trying to imitate current successesthey were achieved with past opportunities Tomorrow’s successes dependon anticipating the future today Beware of developing policy theories using only data from past decades?

4. SOME OF THE OBSERVED OPPORTUNITIESof different magnitudes and outcomes;of single countries or groups of them • The US and Germany caught up with Britainfrom the 1870s in the Age of steel and heavy engineering • Australia, New Zealand, Argentina, etc. made a leapwith counter seasonal trade made possible by steamships and London funding • Western Europe moved to mass consumptionwith the mass production revolution (following US) • Latin America and Asia grew with protected ISIwhen mass production matured (Africa came late) • Japan and the Four Tigers took the double technological opportunity of the paradigm shift to ICT • China (the BRICs?) took the globalisation “train” Could shifting opportunities explainOcampo’s “truncated convergence”?

5. TAKING ADVANTAGE OF EACH OPPORTUNITYDEPENDS ON PREVIOUS CAPABILITIES(technological and social)ON POLITICAL AND ENTREPRENEURIAL WILLAND GOOD TIMING And what different countries getfrom using a particular opportunity is not necessarily the same outcome Both Latin America and the Asian Tigersused the ISI opportunity(when the industries in the Northwere maturing and facing saturated markets)

6. Mature industriesin the advanced worldlooking for market growth “Third World” governments looking for paths to development The ISI opportunity for jobs and growth in Latin America from late-50s to late 70s METHOD Import parts instead of finished products. Set up tariff barriersAccept low productivity and high prices to increase employment FOCUS Final stage of fabricating (assembly) industries for the domestic market (the mature products of ‘Fordism’). In practice little technological learning and rare innovationBut, together with multiplier effect (suppliers) created its own demand LEARNING In the complementary activities and the processing industries:Construction, infrastructures; transport, commerce, distribution, banking, etcManagement of large and small firmsProcessing industries: food, beer, cement, paper, bottles, metallurgy, etc.And previous learning continued (in some cases intensified)in natural resources: mining, oil, agriculture, livestock, etc. SO ISI ACTED AS THE “STARTER ENGINE” OF ECONOMY WIDE (LIMITED) LEARNING WHILE IT WAS ADEQUATE FOR THE CONTEXT, IT ACHIEVED GROWTH When world conditions changed and protection was lifted, the model collapsed

7. They specialised in mass fabrication (assembly) for export markets THE ASIAN LEAP TO DEVELOPMENT BEGAN WITH ISI, BUT SOON TOOK ADVANTAGEOF THE WINDOW OF OPPORTUNITY THAT OPENED FROM THE 1970s WITH ICT They made alliancesto produceelectronics, electrical, electro-mechanical goods and textile-clothing They took advantage of low-cost labourAND MADE HUGEEFFORTS IN TRAINING AND EDUCATION When the ICT revolution came, they were ready to make the leap NOW THEY ARE ABLE TO INNOVATE THEIR WAY UP

8. To specialize in the PROCESSING industries around natural resources for export markets A ROUTE FOR A SOUTH AMERICAN (double) LEAP TO DEVELOPMENT: TAKING ADVANTAGE OF THE WINDOW OF OPPORTUNITY OF THE 2010s? To make alliances to produceenergy and materials (basic and special, natural and synthetic, macro and nano) and biological products (traditional and advanced, ecological and biotechnological) adding technology and innovating up and downstream When the next revolution comes (possibly bio, nano, new and green materials, etc.) the economies can be ready to make the leap WOULD THAT BE POSSIBLE?

9. The ideas about the role of natural resources in developmenthave changed over time • End 19th Century and early 20th = ADVANTAGE Major asset to favor and finance development (US, Canada, Australia, New Zealand, Argentina, Scandinavian countries) • Post WWII = DISADVANTAGE 1940s-50s: Increasing advantage goes to manufacturing industry. Price Scissors (Prebisch 1945, 1951; Singer 1949)1970’s: Dutch disease (The Economist 1977, Corden 1982)1980s and 1990s: “Resource curse” (Sachs and Wagner 1995, Auty 1995) • 2000s = COULD THEY BE AN ADVANTAGE NOW?

10. REVISITING THE NATURAL RESOURCES ISSUE. WHAT HAS CHANGED? Price level and trend? Probably higher (demand greater than supply) Volatility? Continues Corruption? Still a problem Nature of markets? From mainly commodities to hyper-segmentation(while much of manufacturing and services has been commoditized). Long tail in products long tail in materials Market growth? Strong in emerging countries (Engels law prolonged, if full globalization occurs). New billions to middle class need to be fed Technological dynamism? Much greater, facilitated by ICT, spurred by differentiation in demand and increasinglyshaped by environmental and health concerns Type of innovation? From mainly process innovation (to lower the cost of homogenous products and to overcome local limits) to special product innovation and customization with higher profit margins and possible barriers to entry

11. REVISITING THE POTENTIAL FOR TECHNOLOGICAL CATCHING-UP Behavior of MNCs? From enclave with affiliates to global networks with suppliers and partners (much greater interest in transfer of technology to ensure final quality) From cartel-type behavior (or market control) to East West competition for access to resources, creating conditions for a stronger negotiating position Access to information? Significantly enhanced Access to markets? Much greater variety of distribution outlets and transport systems for different quantities and qualities, all enabled by ICT Initiating local production? From domestic to global markets; protection difficult; possession of natural resources becomes important advantage; Asia has become the factory of the world (huge advantage in experience and labor costs) Nature of markets? From homogeneous (three tier) to hyper-segmented diversity, adaptability, special products (long tail). Coexistence of multiple technologies. New price-scissors between standard and “long tail” products?From supply-defined industries to user-defined sectors

12. SPECIFICITY OF LATIN AMERICA (with significant differences between countries) Natural endowment? Abundance and variety of resources Population density? Much lower than in Asia Technological capabilities? Tradition and learning in NR activities and in the processing industries: strong in agro-industry but also chemistry and metallurgy Infrastructures? Relatively well developed physical and business support infrastructure: ports, roads, electricity, water, telecom, banking, transport, construction industry, etc. Social capabilities? Educated middle class with organizational and business experience (basis for improvement) Main limitations? Unchanging traditional power structures; high levels of poverty, corruption, poor education, etc. Can these countries use Asian markets to achievetechnologically dynamic and inclusive growth by innovating around NR?

13. Investment(incl. exploration) NR-Production Processing A1 Processing B1 Equipment Inputs Processing B2 Processing A2 RD&E Services Packaging, branding, etc. Transport, marketing, distribution A successful strategy would need to encompass THE WHOLE NATURAL-RESOURCE-BASED NETWORKfrom capital goods and services to processing and delivery The potential for technological dynamism for the innovation system would driven by the changes occurringin the market context

14. Multiple engineering services Design, construction, adaptation and maintenance • Software and systems services • Capital goods: Equipment and instruments Design, construction, adaptation, installation, compatibility, etc. • Laboratory servicesQuality control, evaluation, measurement, certificates, etc. • Conservation and packagingR&D, engineering, design, production, services • Transport, marketing and distributionStandard, adapted and specialised • Technical service to users • Market intelligence • R&DImprovements and new products • Patent lawyers; contract negotiation • Training and education of specialised personnel • Etc, etc. THE NATURAL RESOURCE INDUSTRIES WITH THEIR INNOVATION NETWORKS • Mining/Metallurgy • Chemicals, petrochemicals • Pharmaceuticals • Custom materials • Livestock • Agriculture, hydroponics • Agro-industries • Biotechnology • Fisheries, aquaculture • Forestry, paper • Ceramics, glass • Packaging • Energy/Electricity • Refining • Nanotechnology • Tourism • Etc. EACH INCLUDING COMMODITIES AND SPECIALITIES Success depends on continuous improvement of technologies, companies, products, human capital and networks

15. The forces driving innovation in the natural resource networks MARKET REQUIREMENTS Segmentation and differentiation Importance of qualities(custom materials) Public opinion + environment Pro-recycling and renewablesvs. pollution Ease of distancecoordination Ease in handlingvariety at all levels Drastic reduction intime and cost ofinnovation andadaptation Biotech, nanotech, applicationsto NR activities Green chemistry Etc. etc. etc Challenges toovercome: Diminishing quality of deposits, lands, etc. Greater difficultyof access Limited andimmobile supplyof different qualities Economies of scale in processingEtc. NATURAL RESOURCE-BASED NETWORK EQUIPMENT INPUTS SERVICES RD&E INVESTMENT (Incl. exploration when relevant) MARKET VOLUME ICT AND OTHER S&T ADVANCES PRODUCTION PROCESSING (1,2,3…N) PACKAGING DISTRIBUTION Globalisation of production Outsourcing-off-shoringand corporate social responsibility Competition between Chinaand the West for scarce resources Prospective change in relative costs(energy, materials, transport, labour)favouring processing in situ MARKET CONTEXT

16. A strategy based on thempromises rising incomes and better quality of lifefor the participants TAKING THE LIMITS INTO ACCOUNT THE PROCESSINGINDUSTRIES require increasinglyqualified personnel BUT THEY ARE NOT LABOUR INTENSIVE Latin America has a very serious income distribution and employment problem HOW CAN GROWTH BE ACHIEVED WITH SOCIAL EQUITY?

17. Economic growthand global positioning Full employment and well beingfor all TWO DIFFERENT AND COMPLEMENTARY GOALS TWO DIFFERENT YET INTEGRATED PARTS OF THE ECONOMY

18. COMPETITIVE TECHNOLOGIESFOR GLOBAL MARKETS ENGINES OF GROWTH Constantly upgraded production networksaround natural resources An active State facilitating and promoting local initiative INFRASTRUCTURE, FUNDS, ENABLING INSTITUTIONS AND ‘HUMAN CAPITAL’ interconnected specialised ‘local’ economies (clusters) A DUAL INTEGRATED MODEL: TOP-DOWN AND GRASSROOTS-UPwith converging processes of growth and innovation Objective:Growth and generation of foreign exchange Objective: To raise the quality of life of all inhabitants Differentiated development of each part of the territory based on the local productive vocation, identified or promotedFOR DOMESTIC OR FOREIGN MARKETS

19. The promise of this particular strategy is not much greater than that of ISIbut it can be ambitious when taking paradigm shifts into account: A LEAP IN DEVELOPMENT IN TWO STAGES Prepare to make a leapin development with the next technological revolutionby developing capabilities,companies and global networks in the sectors of the future(biotechnology, nanotechnology,bioelectronics, new materials?) Achieve growth now taking advantage of the current window of opportunity for natural resource producers That is what Asia did –without planning it– with the ICT revolution Yet it requires intense efforts in training, education, RD&Eand innovative cooperation at all levels and in all stages DOES LATIN AMERICA HAVE THE SOCIAL CAPABILITIES FOR THIS?

20. Can this strategy be applied by other natural resource producers? Yes. The most likely is that there will be competition among producers as well as among the companies and countriesthat require the resources Advantages will probably go to: • To those who have already acquiredbasic technological and social capabilitiesfor producing, negotiating, networking and innovating • To those possessing the resourceswith more dynamic demand and higher prices • And to those with first mover advantages The diversity of resources will result in a variety of competition conditions

21. THE OBSTACLES AND THE UNCERTAINTIES Prices? Corruption? Dutch disease? Climate change? Environmental policies affecting demand? Biotech and other radical innovation risks? Over-exploitation of resources? Political resistance? Etc All strategies face different obstacles and uncertainties Successful strategies are about facing themwhile taking advantage of the opportunities THE GREATEST RISK IS MISSING THE BOAT!