Industrial policy in Chile

Chile has experimented with practically every type of industrial policy in the book: from heavy import substitution, public ownership of domestic firms, directed credit, and heavy use of development banking; to a completely free-market approach. After the liberalization and privatization of the military regime’s early days in the decade of the seventies, a more pragmatic approach was adopted in the eighties. After the return to democracy in 1990, an even greater role was given to the state, while remaining in what could be labeled a horizontal approach, emphasizing the resolution of economy-wide market failures but still eschewing sector selection. A large number of programs aimed at facilitating investment and technological upgrading especially by small and medium enterprises (SMEs) were instituted in the early 1990s, mainly by CORFO, a development agency set up during the heyday of import substitution in 1939. CORFO has also attempted to relax these firms’ borrowing constraints through what amount to a series of development banking programs. During the current decade, Chile has moved to a more focused industrial policy, emphasizing the sectors in which the country has comparative advantages or those it could be expected to develop in a reasonable period of time. CORFO has given increasing emphasis to subsidizing the formation and operation of innovation-based consortia between private firms and universities and other activities related to innovation, increasingly in nine sectors singled out for special treatment by high-level National Council on Innovation for Competitiveness (NCIC) created in 2006.This paper studies three horizontal policy instruments and two vertical ones. The horizontal instruments are (1) a guarantee program for borrowing by SMEs (FOGAPE), (2) a highly ingenious small subsidy to new exports that was operated from 1985 through 2003, and (3) the innovation subsidies provided by CORFO. The vertical policy instruments are the activities of Fundacion Chile (FCh), a semi-public entrepreneur cum venture capitalist, and a CORFO program to attract foreign direct investment in information technology. One conclusion of the study is that most of the programs instituted by the government are well oriented, with clearly defined goals and addressing real problems faced by Chilean entrepreneurs. However, there is a great proliferation of programs, each one of them insufficiently funded. The country could benefit from a prioritization of needs and a consolidation of programs. Second, the instruments for making strategic bets on new sectors are particularly weak. In spite of a track record of success, they are endowed with resources that are too meager for them to have a major impact on the economy. In particular, FCh needs to refocus its activities on high-risk projects with long payoffs, something it cannot do with its small endowment.