Productive Development Policies in a Nutshell: A Tale of Two Interventions

Agricultural - Natural Resource Economics
Globalization - Trade
Microeconomics - Competition - Productivity

Productive development policies (or industrial policies) can prove to be a key tool for a country’s development. Yet, as experience in Latin America clearly shows, they can also create serious problems. Nevertheless, these policies take a variety of forms. The key question is: what types of industrial policies should be adopted and which ones should not? This issue was the focus of our latest edition of the IDB’s flagship publication (Development in the Americas—DIA) entitled Rethinking Productive Development and will be discussed in greater depth in future blogs. For now, we will simply present a comparative example that illustrates how different policies within a particular sector—rice—can lead to very different outcomes.

Dysfunctional Market Interventions in Costa Rica

A central player in rice policy in Costa Rica has been the Corporación Arrocera Nacional (CONARROZ), created to protect producers from international price shocks and improve local production conditions. But the efforts of CONARROZ, which has strong lobbying capabilities, have focused entirely on the first objective (protection) and not the second (productivity).

As a result of CONARROZ’s efforts, rice is one of the most protected commodities in Costa Rica, with tariffs of 35%. When local production is less than local demand (as is typically the case), import quotas are allocated to private sector actors, who can import rice without paying the corresponding tariffs. CONARROZ manages the quotas, which are assigned to rice processors in proportion to their processing capacity. Thus, processors can purchase rice at international market prices and sell the processed rice in Costa Rica at prices that reflect the high level of protection, generating extraordinary rents.

Altogether, rice policy in Costa Rica implies important transfers from consumers (in particular, the poor, for whom rice represents a large share of their consumption basket) to medium and large rice producers and processors.

Provision of Public Inputs and Resolution of Coordination Problems in Entre Ríos, Argentina

The experience of Costa Rica contrasts with that of Entre Ríos, Argentina, where problems in the rice sector were addressed using public inputs. In this case, the key players have been the National Agricultural Technology Institute (INTA) and Pro-Arroz, a foundation of local producers.

In the late 1990s, this province produced one low-quality, low-productivity variety, mainly for export to the Brazilian market. With the devaluation of the Brazilian currency in 1999, the sector lost competitiveness. Since the early 1990s, INTA had been developing a new variety of rice of better quality and higher productivity.

Rather than lobbying for protection or subsidies, Pro-Arroz organized the producers to complement the financing of the local chapter of INTA, INTA-Concepción, by coordinating its members’ contributions. Later, and at the request of Pro-Arroz, the provincial government introduced a tax on producers that went directly into financing the research activities of INTA-Concepción.

This is a clear mechanism to prevent some producers from taking advantage of collective efforts without doing their part (free riding), where the state helps to solve coordination problems of the private sector. Rice producers collaborated by lending their fields for the necessary experimentation with the new variety. Thanks to the successful introduction of the new variety (known as Camba), the sector’s productivity rose rapidly, boosting its competitiveness.

In the process, INTA went on to become a global leader in rice technology, and has since developed a more sophisticated variety (Puita), which has been successfully introduced in many countries, in association with BASF, the German chemical company. The results in each country in terms of productivity are very clear, as seen in Figure 1.

More information on Productive Development Policies can be found here.

This article was first published in the Ideas que Cuentan Blog, on January 13, 2015.

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