The complex and interconnected challenges facing Latin America and the Caribbean in the 21st century demand a fundamental shift in how the region approaches production transformation. This chapter presents a new vision for productive development policies in the region. The goal of the new approach is to foster not just productivity growth but also social inclusion and environmental sustainability. It requires scaling up investment in productive development policies, strengthening their governance, deepening place-based approaches and bolstering private-sector commitment, with a strong focus on internationalisation. The chapter also presents a comparative analysis of productive development strategies across the region. It concludes with recommendations emphasising areas where improved policy can offer the highest potential return.
Latin American Economic Outlook 2025
Abstract
The Latin America and the Caribbean (LAC) region has historically exhibited significant reliance on commodity exports, a situation that contributes to macroeconomic volatility and limited diversification towards higher value-added activities (Ocampo and Ros, 2011[1]; OECD/UN, 2018[2]). This dependence is coupled with substantial heterogeneity in productivity levels – not only between sectors, for example a modern agricultural export sector versus informal sectors, but also within sectors at the firm level and across different territories within countries (ECLAC, 2007[3]; IDB, 2010[4]; OECD et al., 2019[5]) (OECD/UN/UNIDO, 2019[6]). There are significant disparities in labour productivity between large, export-oriented firms and smaller, domestically focused enterprises in the same sector (Chapter 1).
The imperative for production transformation in LAC extends beyond traditional economic considerations to encompass social and environmental dimensions. The region faces the urgent challenge of transitioning towards production structures that are not only more productive and diversified but also more sustainable, inclusive and resilient to global shocks. This comprehensive transformation requires moving from abstract development goals to well-designed productive development policies (PDPs) that can drive structural change across multiple dimensions simultaneously.
The early 21st century has witnessed a resurgence of interest in PDPs globally. This renewed focus is driven by several interconnected factors. The resurgence of interest in industrial and PDPs was strongly inspired by the better understanding, based on overwhelming evidence and increasingly accepted by the mainstream economic profession, that the developmental states of East Asia had successfully used industrial policies to help them rapidly absorb know-how, technology and knowledge from the rest of the world, to assimilate it at a tremendous pace and to diversify into new and more sophisticated products. The work of the World Bank’s Commission on Growth and Development, launched in 2006, was an important step towards a fresh appraisal of industrial policies. Its report concluded that economists lack understanding of the growth process, in particular of the link between education, training and technologies, on the one hand, and growth, on the other. One the strongest boost to the reassertion of industrial policy came with the onset of the financial crisis in 2007-2008. The crisis served as a reminder that unregulated markets and weak states provide a poor institutional environment for managing economies and societies. Just as importantly, it opened up an interest in more sustainable and more inclusive strategies in advanced countries, including a possible role for industrial policy, not only in areas such as infrastructure development and the green economy but also in what some saw as the undue hollowing out of the manufacturing and skills based (Salazar-Xirinachs, Nubbler and Kozul-Wright, 2014[7]).
More recently, growing concerns about the fragility of global value chains, exposed by events like the COVID-19 pandemic, have prompted governments to prioritise the resilience and diversification of domestic value chains (Baldwin and Evenett, 2020[8]). The urgent need to address climate change has spurred the development of industrial policies aimed at fostering green technologies and sustainable production practices (UNEP, 2011[9]). Evolving geopolitical landscapes and increasing strategic competition among major economies have also highlighted the importance of bolstering domestic productive capabilities in key sectors, such as digital or advanced manufacturing (ECLAC, 2020[10]).The pursuit of sustained and higher growth remains a central motivation for the renewed interest in PDPs, as policymakers seek to unlock productivity gains and create better jobs (ECLAC, 2024[11]).
Major economies have implemented proactive PDP efforts in the past years. The European Union has strengthened its industrial strategy through initiatives like the New Industrial Strategy for Europe (European Commission, 2020[12]), the European Green Deal, and more recently the European Digital Compass and the European Chips Act and the comprehensive strategy outlined in the Draghi Report on the future of European competitiveness, which emphasises strategic autonomy in critical technologies and supply chains (European Commission, 2024[13]), back to back with the Letta report on strengthening of the EU single market. In 2021, the European Union launched its Global Gateway Strategy to boost smart, clean and secure links in the digital, climate, energy and transport sectors and to strengthen health, education and research systems across the world. Global Gateway aims to mobilise investments with a transformational impact through a Team Europe’s 360º approach. The focus is on smart investments in quality infrastructure, respecting the highest social and environmental standards, in line with European Union values: rule of law, human rights and international norms.
The United States has launched initiatives such as the American Jobs Plan and the CHIPS and Science Act (United States Congress, 2022[14]). These initiatives aim to reshore critical manufacturing, invest in infrastructure and boost research and development (R&D) in key technologies. A more recent initiative is the Inflation Reduction Act, which represents the largest climate investment in United States history while also targeting critical manufacturing and supply chain resilience (United States Congress, 2022[15]).
The People’s Republic of China continues to implement its strategic industrial policies, exemplified by Made in China 2025, which focuses on technological self-reliance and global leadership in strategic industries (State Council of the People's Republic of China, 2015[16]). Similarly, countries like Singapore and South Korea have long histories of leveraging targeted interventions to achieve remarkable transformations in their production structures (Amsden, 1992[17]; Wade, 1990[18]).
For LAC, the ongoing reconfiguration of global value chains and the rise of nearshoring and friendshoring present significant opportunities and challenges for achieving comprehensive production transformation (ECLAC, 2023[19]) (Chapter 4). The potential to attract foreign direct investment (FDI) seeking closer proximity to major markets could provide a much-needed boost to productivity and diversification. However, in order to enhance the region’s genuine competitiveness, proactive PDPs are needed to address existing bottlenecks in infrastructure, skills, regulation and the business environment (ECLAC, 2020[10]). Without well-designed interventions, LAC risks remaining on the periphery of these global shifts or attracting only low value-added activities (Devlin and Moguillansky, 2011[20])
Against the backdrop of increasing geopolitical tensions, climate urgency and technological disruption, there is a clear and compelling case for LAC to embrace a renewed vision for PDPs – one that learns from past experiences, adapts to the current global context and is tailored to the region’s unique challenges and opportunities (ECLAC, 2024[21]; Salazar-Xirinachs and Llinás, 2023[22]; ECLAC, 2024[11]). These policies must be designed to foster sustainable and inclusive growth (ECLAC, 2022[23]) (Chapter 1). The need for strong production transformation strategies becomes even more urgent given the current trade frictions between major economies and strategic competition for technological and energy dominance, which are reshaping global production networks and innovation ecosystems. This chapter presents frameworks and recommendations for taking action on PDPs in LAC in order to forge strong production transformation strategies. It analyses the region's current initiatives and provides policy guidance to enhance their scale and effectiveness.
To understand why LAC needs a renewed vision for PDPs, the evolution of the region's production structure and their rich but complex history of industrial and economic transformation must be examined. This historical perspective reveals patterns of both achievement and limitation that should inform new approach for the design and implementation of PDPs.
The regions’ production structure remained relatively stable in the last two decades. Services related activities make the largest contribution to GDP (Figure 2.1). Wholesale and retail, trade, financial activities, communication, transport and public administration accounted for 67% of GDP in 2022, slightly lower than the 70% recorded in 2006. Within this group, financial services have expanded since 2006, increasing from 17% to 19%. Even though industry has stagnated or declined in most LAC countries over the past years, the manufacturing sector continues to contribute a significant share of the region’s GDP, accounting for 11% in 2022. The agriculture’s contribution shrunk from 8% in 2006 to 6% in 2022, yet the sector remains an essential driver of growth and exports (Figure 2.1).
Note: LAC countries are detailed in the note of Figure 2.2. Transport includes storage, communications and auxiliary activities. Financial activities include intermediation, real estate, renting and business activities. Public administration includes defence, compulsory social security, education, health and social work and other community, social and personal service activities. Wholesale includes retail trade and repair of goods. Agriculture includes hunting, forestry and fishing. Communication includes post and telecommunications.
Source: Authors’ elaboration based on (ECLAC, 2025[24]).
The strong heterogeneity of the region’s economies can be illustrated by grouping LAC countries into four different types, based on their export profile. Service export-based economies are predominantly oriented toward activities such as wholesale, finance, public administration, communication, hotels and restaurants, which serve as the main driver of value added. In these economies service-related activities made up 80% of GDP, while the manufacturing sector played a minor role compared to the rest of LAC, representing only 3% of GDP in 2022. On the contrary, commodity export-based economies rely more heavily on agriculture and mining, jointly contributing to more than 15% of GDP in 2022 (Figure 2.2). Diversified low complexity economies present a more balanced mix between manufacturing, services and primary sectors, but with a more limited industrial upgrading and technological sophistication than diversified high-complexity economies. These economies are characterised by a similar sectoral mix, though with greater industrial depth and technological intensity, which is associated with higher levels of productivity and economic sophistication. In these countries services remain central, but manufacturing has a stronger weight compared to the regional average, accounting for approximately 16% of GDP in 2022 (Figure 2.2).
Note: For the four panels, the following classification was applied: commodity export–based economies are defined as those with more than 60% of merchandise exports in commodities, with data stemming from Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Jamaica, Paraguay, Peru, and Uruguay. Service export–based economies are defined as those with more than 45% of exports in services, with data stemming from the Bahamas, Dominica, Grenada, and Saint Vincent and the Grenadines. Economies ranked in the top 60 of the Economic Complexity Index – Costa Rica, the Dominican Republic, Mexico, and Trinidad and Tobago – are classified as diversified with high economic complexity, while the group of diversified low complexity is based on data from Barbados, El Salvador, Guatemala, Honduras, and Nicaragua.
Regarding the sector definitions, transport includes storage, communications, and auxiliary activities. Financial activities include intermediation, real estate, renting, and business activities. Public administration covers defence, compulsory social security, education, health, social work, and other community or personal services. Wholesale includes retail trade and repair of goods. Agriculture includes hunting, forestry, and fishing. Communication refers to post and telecommunications.
Source: Authors’ elaboration based on (ECLAC, 2025[24]).
Historical context
The need for a renewed vision for PDPs in LAC is not only underscored by the region’s persistent structural patterns and growing heterogeneity among its economies but also by the historical experiences with industrial transformation. Despite relative stability in the production structure over the past two decades, services continue to dominate GDP, while industry and agriculture have either stagnated or declined. The diversity of economic profiles highlights the need for tailored, context-sensitive PDPs. Learning from past successes and limitations, future policies must reflect this complexity to foster inclusive and sustainable production transformation across the region.
The import substitution legacy (1950s-1980s): Ambitious vision, mixed results
The region’s first systematic approach to production transformation emerged from the structuralist thinking pioneered by Raúl Prebisch and the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Countries like Argentina, Brazil and Mexico built substantial industrial capacity through protected domestic markets and state-led investment. While this era successfully diversified economies away from pure commodity dependence and created important industrial capabilities, it also generated protected industries with limited international competitiveness and high fiscal costs.
One of the key lessons from this period is not that state intervention in addressing market failures was wrong per se, but rather that the design lacked mechanisms for ensuring efficiency, international competitiveness, adaptation and phasing-out over time. This experience taught us that PDPs need built-in incentives for continuous improvement and global integration and that they need to be accompanied by measures to prevent rent-seeking behaviour and ensure the policies do not stifle competition and innovation.
The market reform era (1990s-2000s): Efficiency gains, structural gaps
The pendulum then swung towards market-oriented reforms, with many countries dismantling industrial policies in favour of horizontal approaches focused on macroeconomic stability, privatisation and trade liberalisation. While these reforms delivered important benefits, including reduced inflation, improved fiscal discipline and greater trade integration, they often failed to address the deeper structural challenges of productivity growth and economic diversification, while exposing national economies to a sudden wave of international flows that undermine previous industrial efforts.
Countries that relied primarily on market mechanisms found themselves vulnerable to commodity price volatility and struggled to develop the innovation capabilities and high-value activities necessary for sustained growth. The lesson here is that while markets are essential for efficiency, they alone cannot drive the co‑ordinated investments in capabilities, infrastructure, productive linkages and institutions required for production transformation and productivity growth.
Hybrid approaches (2010s-present): Sophisticated design, implementation challenges
Learning from both previous experiences, many LAC countries have recently developed more nuanced approaches that attempt to combine market mechanisms with strategic state intervention. Brazil's various industrial policies, Chile's innovation and cluster initiatives, Colombia's competitiveness agendas, Costa Rica’s and the Dominican Republic’s sectoral investment attraction policies and Mexico’s sectoral strategies represent sophisticated attempts to address the limitations of pure state-led and pure market-led approaches.
However, even these more sophisticated policies have struggled with implementation challenges, institutional co‑ordination problems, lack of financial resources and insufficient scale to generate transformative change. Countries are doing better at designing these policies, but they have not yet mastered the art of implementing them effectively. The complex evolution of industrial and economic policies in LAC limited the possibilities of structural transformation, constraining the shift of resources towards higher value-added and higher productivity sectors.
A new era for productive development policies in LAC
Building on these lessons, this Latin American Economic Outlook proposes a new approach to PDPs that would represent a fundamental evolution in how LAC conceives and implements economic transformation strategies. This comprehensive approach addresses the historical shortcomings identified across decades of policy experimentation through four interconnected innovations:
The first innovation establishes governance mechanisms designed for continuity and deep stakeholder commitment that can transcend the political cycles that have historically undermined long-term productive development efforts. It creates institutional arrangements that maintain strategic coherence even as governments change.
The second innovation introduces institutional capability frameworks that ensure that policies can be implemented in practice. Moving beyond the sophisticated policy design that has characterised recent efforts, it focuses on the technical, operational, political and prospective capabilities necessary to translate plans into results.
The third innovation embraces place-based approaches that leverage territorial assets and competitive advantages while maintaining national coherence. It recognises that production transformation must be rooted in local realities and capabilities rather than imposed through one-size-fits-all national strategies.
The fourth innovation combines strategic prioritisation with adequate resource mobilisation to achieve transformative scale. Addressing the chronic problem of spreading limited resources too thinly, it concentrates efforts on carefully selected driving sectors while ensuring that sufficient financial, human and institutional resources are committed to generate meaningful production transformation rather than marginal adjustments to existing productive patterns.
This vision entails several key elements.
Productive development policies as horizontal and vertical efforts to spur production transformation and productivity
It is important to understand PDPs as a set of co‑ordinated public interventions that encompass both horizontal policies, i.e. those affecting the entire economy or multiple sectors, such as R&D, public procurement, tax credits and entrepreneurship promotion programmes, and vertical policies that target specific sectors, technologies or activities deemed strategic for development, such as support for renewable energy or advanced manufacturing.
The overarching goal of these policies is to foster comprehensive production transformation as a vehicle not just for productivity growth but also for social inclusion and environmental sustainability. Production transformation involves upgrading, diversifying and generating a positive structural change in the economy. This transformation implies moving towards higher value-added activities, greater diversification, increased technological sophistication, more inclusive employment generation and environmentally responsible production methods (ECLAC, 2007[3]; Lin and Chang, 2009[25]; Salazar-Xirinachs, Nubbler and Kozul-Wright, 2014[7]; ECLAC, 2024[26]; ECLAC, 2024[21]). Production transformation is the primary mechanism for achieving sustained productivity growth and more sustainable and inclusive methods of production at the aggregate level. This systemic definition states that gains are not solely the result of firm-level efficiency, but are deeply embedded in the broader economic structure, shaped by social outcomes, environmental sustainability, and the dynamic nature of innovation. It also acknowledges the evolutionary character of economic change and the critical role of technical progress over time – highlighting how innovation drives transformation across the productive ecosystem (Nelson and Winter, 1982[27]).
While modern PDPs integrate horizontal and vertical elements, the prioritisation of strategic sectors introduces a natural tension (Lin and Chang, 2009[25]). On the one hand, horizontal policies aim to level the playing field across sectors; on the other, vertical interventions focus resources on prioritised sectors or areas. In contexts of fiscal constraint and urgent development needs, policymakers are effectively “doomed to prioritise”, raising the question of which approach should take precedence. A clear articulation of the complementarities between these two logics is needed for coherent and effective PDP design.
A broad-based view of productive development policies: Beyond the manufacturing sector
The new vision for PDPs in LAC must adopt a broader perspective, recognising the significant potential for productivity growth and diversification across a wide range of economic activities. Traditional PDPs in the region have often focused on manufacturing, reflecting the legacy of import substitution industrialisation (Prebisch, 1950[28]). The new approach must expand to include sophisticated exportable services such as software development, information technology-enabled services, artificial intelligence (AI)-based solutions and modern agriculture, which increasingly anchor value creation in global value chains.
At the same time, not all services are equally strategic. Some back-office functions may be vulnerable to automation or lack tradability and should not be the focus of state support. Moreover, non-tradable sectors such as logistics, sustainable construction and health services offer substantial productivity improvement opportunities and can be legitimate targets of PDPs, especially when they address systemic bottlenecks or generate productivity spillovers (ECLAC, 2016[29]).
This broad-based view builds on the evolving nature of structural change, leapfrog and global trends. It aims to balance “industrial policy in the small” – supporting productivity in proximate sectors – with “industrial policy in the large” – targeting longer jumps towards more sophisticated products and services (Hausmann, Rodrik and Sabel, 2008[30]; Llinás, 2021[31]; Cherif and Hasanov, 2019[32]; Lee, 2019[33]). It allows each country to tailor its strategy to its development stage, comparative advantages and institutional capabilities.
Governance, not subsidies, up front: Understanding productive development policies as multistakeholder efforts
A critical element of a renewed vision for PDPs in LAC is a fundamental shift in emphasis from reliance on untargeted and poorly designed subsidies and trade protection towards robust governance mechanisms and genuine multistakeholder collaboration (Rodrik, 2004[34]). While carefully targeted financial and tax-related instruments may play a role in specific, well-justified contexts (e.g. to address specific market failures or incentivise risky but high-potential investments) (Chapter 3), the primary focus should be on establishing effective platforms for dialogue, co‑ordination and joint problem-solving among government agencies at all levels; the private sector, including firms of all sizes, industry associations and business support organisations; academia; and civil society organisations. This collaborative approach, typical of cluster-based approaches is essential for i) accurately identifying key bottlenecks hindering productive development; ii) setting realistic and shared strategic priorities and building strategic agendas based on them; iii) designing effective and context-specific interventions; iv) ensuring policy coherence across different levels and sectors; and v) fostering greater accountability and ownership of PDP outcomes. The emphasis on governance up front recognises that successful PDPs are not simply about allocating resources but also about building shared understanding, fostering trust and creating the institutional capacity for continuous learning, adaptation and effective implementation (Evans, 1995[35]).
This shift reflects several key insights:
Distributed knowledge. In complex modern economies, relevant information about opportunities, constraints, incentives and potential solutions is widely distributed among various actors rather than concentrated in government agencies.
Resource complementarities. Production transformation typically requires combining diverse resources controlled by different stakeholders, including public agencies, private firms, academic institutions and civil society organisations.
Implementation capabilities. Effective implementation often depends on co‑ordinated action by multiple actors rather than government action alone.
Legitimacy and sustainability. Policies developed through inclusive processes tend to enjoy greater legitimacy and sustainability across political cycles.
Fiscal constraints. Many LAC countries face significant fiscal limitations that restrict their ability to deploy large-scale financial incentives, making governance-based approaches more feasible.
Governance-centred PDPs emphasise structured mechanisms for dialogue, co‑ordination and collaboration among stakeholders. These may include public-private councils, sectoral roundtables, cluster organisations, value-chain committees and other institutional arrangements that bring together relevant actors to identify constraints, develop shared visions, co‑ordinate actions and monitor results.
This collaborative approach does not eliminate the need for financial and tax-related instruments, which remain important tools in the PDP toolkit (Chapter 3). Rather, it suggests that such instruments should be deployed strategically within robust governance frameworks and strategic agendas that ensure their effectiveness, transparency and alignment with broader development objectives.
Governance for productive development should be understood as going beyond platforms for collaboration. It should be understood broadly as the mechanisms – namely, the instances for collaboration but also the routines, rules of the game and incentives – that facilitate the articulation of multiple stakeholders, resources and efforts around strategic productive development agendas.
Place-based productive development policies: A territorial approach
A new vision for PDPs must embrace a strong place-based approach, recognising the significant territorial heterogeneity within LAC countries in economic structures, resource endowments, development challenges and institutional capacities (ECLAC, 2010[36]; OECD et al., 2019[5]; Salazar-Xirinachs and Llinás, 2023[22]; ECLAC, 2024[11]; ECLAC, 2024[21]). Adopting a place-based approach entails tailoring policies and interventions to the specific needs, assets and challenges of different regions and localities (Barca, McCann and Rodríguez-Pose, 2012[37]; OECD/UN/UNIDO, 2019[6]). Tailoring policies and interventions to specific local needs implies i) identifying and leveraging local competitive advantages and unique resources; ii) fostering the development of regional clusters and value chains that build on local strengths; iii) supporting local entrepreneurship and innovation ecosystems; and iv) addressing sector-specific and territorial bottlenecks in areas such as skills development; science, technology and innovation (STI); infrastructure (transport, energy, digital connectivity); and the quality of local institutions. A place-based approach requires empowering subnational actors (regional and municipal governments, local development agencies), fostering effective interjurisdictional co‑ordination, and building local institutional capacity for the design, implementation and monitoring of PDPs that are responsive to local contexts and needs (OECD, 2023[38]; Rodríguez-Pose, 2018[39]).
A place-based approach to PDPs involves several interconnected elements:
Differentiated diagnoses. Systematically analysing the production structure, capabilities, constraints, available and projected financial resources, and opportunities of different territories to inform targeted interventions.
Multilevel governance. Clearly articulating roles and responsibilities across national, regional and local governments, with appropriate co‑ordination mechanisms to ensure policy coherence.
Territorial capacity building. Strengthening the capabilities of subnational governments and local stakeholders to design, implement and evaluate place-based productive development initiatives.
Spatial targeting. Directing specific resources and programmes to address the challenges of different types of territories, including lagging regions, intermediate cities and metropolitan areas.
Territorial innovation systems. Nurturing the local ecosystems of institutions, firms and knowledge flows that support innovation and upgrading in specific places.
Urban-rural linkages. Strengthening the connections between urban and rural areas to create more integrated and inclusive territorial economies.
Productive development remains highly unequal across regions within LAC countries, requiring PDPs that systematically assess and leverage local production assets and capabilities. The assessment of place-based policies can be challenging due to the complexity of territorial dynamics and the difficulty of isolating policy effects from other local factors. However, the persistence of regional disparities demands that PDPs move beyond one-size-fits-all approaches towards a nuanced understanding of local production ecosystems, asset endowments and development constraints. This territorial lens is essential not only for equity considerations but also for maximising the efficiency of public investments by building on existing local strengths rather than attempting to impose external development models (Barca, McCann and Rodríguez-Pose, 2012[37]).
Addressing bottlenecks on multiple fronts and forging strategic productive development policy agendas
A critical foundation for any effective PDP is the systematic identification and analysis of root causes that constrain sustainable productive development (Hausmann, Rodrik and Sabel, 2008[30]; Rodrik, 2004[34]). Rather than addressing symptoms through isolated interventions, successful PDPs must diagnose the fundamental structural, institutional, market and government failures that perpetuate low productivity and limited diversification (Crespi, Fernández-Arias and Stein, 2014[40]). This requires employing diverse analytical approaches and diagnostic tools in order to understand how different constraints interact with and reinforce each other within specific national, territorial and sectoral contexts. The main issues captured in contemporary PDPs often reflect surface-level problems rather than underlying causes. More rigorous analytical frameworks are needed that can identify leverage points for sustainable transformation (ECLAC, 2024[11]; ECLAC, 2024[21]).
Productivity growth and production transformation are often hampered by bottlenecks that span various dimensions of the production ecosystem (Hausmann, Rodrik and Sabel, 2008[30]). These can include i) inadequate physical infrastructure (transport, energy, information and communications technology [ICT]); ii) limited access to finance, particularly for small and medium-sized enterprises (SMEs) and innovative ventures (Beck and Demirgüç-Kunt, 2006[41]) (Chapter 3); iii) skills gaps at all levels, from basic education to advanced technical and managerial expertise (Hanushek and Woessmann, 2015[42]); iv) weak innovation ecosystems characterised by limited R&D investment and weak linkages between academia and industry (Chapter 4); v) burdensome regulatory environments and administrative hurdles (Djankov et al., 2002[43]); and vi) deficiencies in business support services (e.g. technology extension, market intelligence).
The effectiveness of PDPs depends on their ability to address these multiple dimensions in an integrated and strategic manner, recognising their interdependencies and identifying the specific combinations of constraints that limit sustainable and inclusive productivity growth in particular contexts. This requires moving beyond siloed approaches towards strategic agendas that co‑ordinate actions across different policy domains and stakeholder groups.
A renewed vision for PDPs in LAC requires a comprehensive and integrated approach that systematically identifies and addresses these interconnected bottlenecks in a co‑ordinated manner. Crucially, bridging skills gaps at all levels – from improving the quality and relevance of basic education to providing specialised vocational training and fostering lifelong learning – must be a central pillar of these co‑ordinated efforts (World Bank, 2019). For example, efforts to promote a particular strategic sector might involve simultaneous investments in R&D infrastructure relevant to that sector, the development of specialised training programmes to meet its skill needs and the simplification of relevant regulations to reduce the cost of doing environmentally and socially responsible business.
The production structure is at the centre of the comprehensive and interconnected approach that underpins modern PDPs. These policies aim to transform the production structure – comprising sectors, value chains, clusters and firms of various sizes – through upgrading, diversification and positive structural change. The production structure encompasses ten key policy domains that serve as the primary areas of intervention (Figure 2.3). These policy dimensions, depicted as pillars, should be addressed and articulated within the PDP framework. The diagram highlights that PDPs are underpinned by cross-cutting support such as governance structures and a territorial approach, recognising the need for policy coherence across levels of government and the role of local actors (ECLAC, 2024[11]). This systemic vision reflects the understanding that production transformation requires not only targeted incentives but also institutional collaboration, strategic public goods and iterative, evidence-based policymaking.
Source: (ECLAC, 2024[11]).
Doomed to prioritise: The need to identify and promote strategic driving sectors
Countries and territories are doomed to prioritise, to paraphrase Hausmann and Rodrik (2006). This is especially the case in LAC, conditioned by a context marked by climate urgency, geopolitical tensions, technological bifurcation, widening inequalities and numerous bottlenecks that hinder production transformation. The path to high, sustained and sustainable growth requires identifying and promoting strategic driving sectors that can shift the productive matrix towards higher value-added and more knowledge-intensive activities (ECLAC, 2012[44]; ECLAC, 2024[11]; ECLAC, 2024[21]; ECLAC, 2020[10]).
Given the constraints of financial, institutional and political resources and the inherent complexity of fostering broad-based structural transformation, LAC countries must make strategic choices. They must prioritise interventions in carefully selected driving sectors or activities with significant potential for productivity growth, diversification, job creation (especially higher-quality jobs) and positive spillover effects, including those related to the environment. The selection of these strategic priorities should be based on i) a rigorous analysis of the country's existing capabilities and comparative advantages (Chapter 1); ii) emerging global trends and market opportunities (e.g. in green technologies or digital services); iii) the potential for sustainable development; iv) a clear understanding of the potential for intersectoral linkages and knowledge diffusion; and v) the legitimacy that comes from inclusive, multistakeholder engagement (ECLAC, 2024[11]).
This prioritisation process should be dynamic and subject to periodic review and adjustment based on evolving circumstances, technological advancements and evidence from policy learning. Prioritisation is crucial to avoid spreading limited public resources too thinly across an excessive number of sectors, which can dilute the impact of PDPs and hinder meaningful structural change (Aiginger, 2007[45]).
While prioritisation should leverage existing capabilities and revealed comparative advantages, it must also create the conditions for building the industries of the future. This requires a balanced approach between what Hausmann, Rodrik and Sabel (2008) describe as “industrial policy in the small” – supporting productivity gains in sectors close to current capabilities – and “industrial policy in the large” – targeting longer jumps toward more distant, knowledge-intensive activities. Recent literature (Cherif, Hasanov and Sarsenbayev, 2024[46]) suggests a combination of three strategies: “snail crawl” to strengthen existing sectors, “leapfrog” to upgrade mid-range capabilities and “moonshots” to aim for high-impact, transformative sectors (Cherif, Hasanov and Sarsenbayev, 2024[46]). This strategic mix enables countries to secure quick wins while preparing for future competitiveness. Sector prioritisation must therefore incorporate not only technical feasibility and market potential but also the temporal horizon needed to build capabilities and mobilise collective learning.
Prioritisation should be guided by at least three intertwined axes: sectoral dynamics, territorial articulation and institutional ecosystems. The sectoral dynamics axis involves identifying sectors with scale potential, learning opportunities and systemic linkages. For example, ECLAC’s “big push for sustainability” calls for investing in sectors that are both technologically dynamic and environmentally sustainable, such as renewable energy, electromobility, bioeconomy, sustainable tourism, digital services and advanced manufacturing with circular economy principles. Under territorial articulation, prioritised sectors must be rooted in regional development strategies to reduce territorial disparities, a hallmark of Latin America’s inequality. Through institutional ecosystems, sectoral promotion is co-ordinated across the different dimensions under PDPs. The creation of sectoral councils and productive development agencies is key to orchestrating the complexity of strategic prioritisation.
Prioritisation of strategic sectors is fundamental to modern PDPs. To be effective, sector selection must respond to clear criteria and be grounded in the specifics of each country and territory (UNIDO, 2024[47]). Several key criteria can guide this process:
Existing capabilities and revealed comparative advantages. Prioritise sectors where domestic firms already exhibit competitive performance and show high economic spillovers, such as agribusiness in Brazil or mining in Chile.
Alignment with global megatrends. Select sectors that are positioned to benefit from the green transition, digitalisation or demographic shifts, such as the Chilean Green Hydrogen Strategy.
Sector sophistication and knowledge intensity. Favour sectors that offer high potential for innovation spillovers, technological learning and productivity diffusion. Knowledge-intensive services, advanced manufacturing and technology-enabled sectors can offer greater development potential than traditional manufacturing. Sophistication should be the key criterion. Sectors like pharmaceutical development or electronics manufacturing demand sustained support due to their complexity and learning requirements.
Export and FDI potential. Support sectors where global demand is strong and where strategic integration into value chains is feasible, such as Colombia’s aerospace industry or Costa Rica’s medical devices.
Environmental and social sustainability. Consider sectors that promote inclusive and green growth, such as bioeconomy or sustainable tourism, for purposes of environmental and social sustainability.
Employment intensity and inclusion, including non-tradable services. Incorporate sectors that can generate large-scale employment, especially for low- and middle-skilled workers. As emphasised by Rodrik and Stiglitz (2024), promoting productivity in labour-intensive sectors – including non-tradable services such as construction, domestic commerce, care services and hospitality – can play a crucial role in structural transformation, particularly in economies with large informal labour markets and limited fiscal space. These sectors, though often overlooked, offer substantial potential for inclusive growth and inequality reduction when supported by targeted policies that increase productivity and formalisation.
Apart from these strategies, the mission-oriented approach adopts a framework where sectors are "self-selected" based on their potential to address specific societal challenges and missions, such as climate change mitigation, public health crises or digital inclusion. The approach, developed by Mazzucato (2018), focuses on defining clear, measurable and time-bound missions that require cross-sectoral innovation and collaboration. Rather than selecting sectors in isolation, this method identifies which industries and capabilities are needed to solve pressing societal problems, allowing for more integrated and purpose-driven productive development strategies. For example, a mission to achieve carbon neutrality by 2050 would naturally prioritise renewable energy, energy storage, sustainable transportation and green manufacturing sectors, while a mission to improve equitable healthcare access might focus on pharmaceutical production, medical devices and digital health technologies.
Source: Authors’ elaboration.
A key consideration for the strategic implementation of PDPs is that different sectors require distinct time frames and tailored approaches (Rodrik, 2004[34]; ECLAC, 2024[21]). Some high-tech industries, such as pharmaceuticals or advanced electronics, demand long-term vision and sustained investment over decades, while other sectors may yield results over shorter horizons (Amsden, 1992[17]; Wade, 1990[18]). Policymakers must therefore strike a balance between seizing near-term opportunities and laying the groundwork for longer-term transformation. Crucially, the requirements of each sector vary considerably: what is needed to foster pharmaceutical innovation differs significantly from what is required to scale electronics manufacturing. This underscores the need for sector-specific strategies (Warwick, 2013[48]; ECLAC, 2024[11]).
Sector prioritisation must not be treated as a purely technocratic exercise. It should be approached as a constructive and collective process, involving meaningful dialogue and co‑ordination among key stakeholders, including public institutions, the private sector, academia and civil society (Sabel and Zeitlin, 2010[49]). This participatory approach enhances legitimacy, ensures better alignment with local realities and fosters the commitment necessary for long-term implementation. These cases illustrate that effective sector selection in LAC must go beyond static notions of comparative advantage. It requires embracing dynamic criteria such as learning potential, innovation capacity and sustainability. The experiences of Brazil, Chile and Mexico highlight that successful production transformation depends not only on identifying promising sectors but also on establishing strong institutional co‑ordination among ministries, agencies and private stakeholders, backed by robust multistakeholder governance mechanisms.
Moreover, strategic sector selection must be accompanied by the definition of strategic visions for these sectors that would define the bottlenecks to be addressed through projects and actions related, for example, to specific infrastructure needs, regulatory aspects, human capital, and science and technology agendas, among other policy domains (Llinás, 2021[31]). It is thus critical that sector prioritisation leads to the articulation of multiple productive development efforts around the prioritised sectors.
The experimental governance approach
In a rapidly changing global landscape characterised by accelerating technological disruption, evolving market dynamics and global shocks, a rigid, top-down approach to PDPs is unlikely to be effective.
A renewed vision for LAC must embrace an "experimental governance" approach, characterised by flexibility, learning and adaptation (Sabel and Zeitlin, 2010[49]). This involves designing policies with built-in mechanisms for monitoring, evaluation and feedback, allowing for timely adjustments and course corrections based on evidence of what works and what does not in the specific context of LAC. Examples include Chile's Start-Up Chile programme, which has evolved through multiple iterations based on participant feedback, and Uruguay's ANDE innovation programmes, which incorporate regular evaluation cycles to refine support mechanisms.
The experimental governance approach entails both fostering a culture of experimentation and of risk-taking within policymaking and encouraging the design and implementation of pilot projects and the testing of innovative approaches to address specific development challenges. Effective knowledge sharing and learning across different policy initiatives within a country, and between different countries in the region, are crucial elements of this approach, enabling the diffusion of best practices and the avoidance of past mistakes (Andrews, Pritchett and Woolcock, 2017[50]).
Proponents of the experimental governance approach argue that many reforms in developing countries fail because they rely on copying institutional models that appear successful elsewhere, leading to superficial changes without real functional improvements. To overcome these “capability traps”, effective policy design often requires repeated experimentation, evaluation and refinement rather than predetermined recipes. The experimental governance approach emphasises four main elements:
Provisional goal setting. Establishing clear but revisable objectives that provide direction while allowing for adaptation based on experience and changing conditions.
Decentralised implementation. Enabling diverse actors to develop context-specific approaches to achieve shared goals, drawing on local knowledge and capabilities.
Regular reporting and peer review. Creating structured processes for monitoring progress, sharing experiences and identifying successes and challenges.
Goal and method revision. Periodically revising objectives and approaches based on accumulated learning and emerging insights.
This experimental approach is particularly valuable in LAC contexts characterised by uncertainty, limited information and evolving opportunities. It allows for the creation of tailored solutions to specific productive challenges while generating learning that can inform broader policy development. It also helps to manage risks by enabling incremental progress through smaller-scale experiments before broader implementation.
Implementing experimental governance requires building appropriate institutional capabilities, including i) data collection and analysis systems to track progress and identify patterns; ii) evaluation frameworks that assess both processes and outcomes; iii) knowledge-management mechanisms that capture and disseminate learning; iv) deliberative forums for stakeholder engagement in review and adaptation; and v) flexible administrative systems that accommodate evolving approaches. By incorporating these experimental elements, PDPs can balance the need for strategic direction with the adaptability required to navigate complex and changing productive landscapes. Several cases of public-private collaboration could be cited as best practices, such as Telefónica-FAO and Colombia projects for Smart Agro, as well as the Telefónica, BID and Meta initiative in Peru through Internet Para Todos.
Productive development policies with a focus on internationalisation
For the predominantly small and open economies prevalent in LAC, internationalisation represents a key driver of productivity growth, competitiveness, and access to larger markets and new technologies (Krugman, 1979[51]) (Chapter 4). Internationalisation is a central organising principle that should guide all PDP efforts. Research and experience across the region consistently demonstrate that internationalisation challenges constitute the key bottleneck for productive development (Crespi, Fernández-Arias and Stein, 2014[40]; ECLAC, 2010[52]). The region's persistent productivity gaps, limited diversification and structural dependence on primary commodities are fundamentally rooted in insufficient integration into dynamic segments of the global economy (Ocampo and Ros, 2011[1]; ECLAC, 2024[21]).
This reality demands that all PDPs – sectoral, territorial and horizontal – be designed and evaluated through the lens of international competitiveness and market integration (UNCTAD, 2023[53]). Rather than treating internationalisation as a separate policy domain, successful PDPs in LAC must embed international market requirements, competitive pressures and global value-chain opportunities into every aspect of their design and implementation. This approach recognises that domestic market size alone cannot provide sufficient scale in small, open economies for achieving competitive productivity levels in most sectors (ECLAC, 2024[21]; Krugman, 1979[51]).
A critical element of internationalisation-focused PDPs is the use of export performance as an indicator of productivity improvements and as a conditionality mechanism for continued support. As demonstrated in successful East Asian experiences, this “export discipline” approach ensures that supported sectors and firms face the competitive pressures necessary to drive genuine productivity gains rather than becoming permanently dependent on protection or subsidies (Hallak and Schott, 2011[54]; ECLAC, 2024[11]). By requiring beneficiaries of PDP support to demonstrate progress towards international competitiveness through export performance, policymakers can maintain market discipline while providing strategic support, ensuring that resources flow to genuinely competitive activities (Rodrik and Stiglitz, 2024[55]).
To enhance the global competitiveness of domestic firms in LAC and facilitate their integration into the global economy, a renewed vision for PDPs must therefore have a strong internationalisation focus. This includes policies aimed at i) enhancing the export competitiveness of domestic firms, for example through export promotion agencies, trade finance support and assistance with meeting international quality standards; ii) actively attracting FDI in strategic sectors that can bring in new technologies, skills and access to global value chains (ECLAC, 2010[52]; UNCTAD, 2023[53]) (Chapter 3); iii) facilitating the integration of local firms into global value chains, for example through supplier development programmes and support for meeting global value chain buyer requirements; iv) promoting technology transfer and international collaboration in R&D; and v) supporting the international expansion of successful local firms. It also involves actively engaging in international trade negotiations and fostering regional economic integration to create larger and more dynamic markets that can provide greater scale and opportunities for domestic producers (Baldwin and Venables, 1995[56]) (Chapter 4).
Within internationalisation’s broad set of strategies, export orientation remains a cornerstone of successful industrial policy, including for larger economies with substantial domestic markets. As emphasised by (Cherif and Hasanov, 2019[32]), sustained export growth, anchored in productivity gains and global competitiveness, is a key feature of the “Asian Miracles”. A focus on exports disciplines firms through exposure to international competition, fosters innovation and encourages continuous upgrading of capabilities. Without this outward orientation, even large markets risk stagnation and protectionist traps that stifle dynamism. LAC countries should therefore embed export-oriented strategies as a central axis of their PDPs, ensuring that industrial upgrading efforts are tightly linked to global demand, quality standards and innovation frontiers. This export emphasis should complement the broader internationalisation agenda that connects domestic firms to global value chains, technologies and knowledge networks.
An internationalisation approach to PDPs should include multiple dimensions: i) positioning LAC’s offerings in international markets; ii) competing effectively with imports; iii) attracting and maximising the impact of FDI; iv) connecting productive sectors with global sources of technology and knowledge, including universities, technology centres, entrepreneurial networks and diaspora communities; v) developing regional productive development agendas; and vi) actively engaging with PDPs of other regions (ECLAC, 2024[11]). This comprehensive approach recognises that internationalisation is not merely about exports but about strategic integration into global knowledge and production networks (Chapter 4).
The specific mix and emphasis of these elements will vary according to country contexts, existing capabilities and strategic priorities. However, all effective internationalisation strategies require alignment with broader productive development objectives and co‑ordination across multiple policy domains and stakeholder groups.
For LAC countries, this internationalisation focus is particularly relevant in the context of ongoing global value chain reconfiguration and of nearshoring and friendshoring opportunities.
Organising productive development policy efforts via cluster and other productive articulation initiatives
The complexity of modern PDPs, which involve multiple policy domains, stakeholder groups and governance levels, creates significant co‑ordination challenges. The new vision emphasises productive articulation initiatives (PAIs) as practical mechanisms for organising and implementing PDP efforts at different operational levels. The concept of PAIs refers to various modalities of strategic collaboration between companies and institutions for productive development (Salazar-Xirinachs, 2020[57]; ECLAC, 2025[58]). It encompasses cluster initiatives, value-chain initiatives, local productive initiatives, business network promotion initiatives and initiatives aimed at generating and consolidating supplier relationships.
These approaches are particularly effective because they integrate governance structures, sectoral prioritisation, a place-based perspective and an experimentalist approach to policymaking (Salazar-Xirinachs, 2020[57]). By providing structured frameworks for stakeholder engagement and co‑ordinated action, PAIs help to translate the broad principles of modern PDPs into practical initiatives with tangible impacts. They therefore offer several advantages as implementation vehicles for PDPs:
Concrete scope. PAIs provide well-defined targets for intervention with clear boundaries and stakeholder groups, helping to translate broad strategies into actionable initiatives.
Co‑ordination platforms. PAIs can serve as structured mechanisms for stakeholder co‑ordination, collaborative problem-solving and collective action.
Efficiency gains. Concentrating efforts on co-located and interconnected actors can maximise impact through synergies and spillovers while economising on implementation resources.
Context specificity. PAIs naturally incorporate local context and conditions, facilitating place-based policies tailored to specific territories.
Balanced governance. Well-designed PAIs can create balanced governance arrangements that incorporate public, private, academic and civil society perspectives while maintaining operational agility.
PAIs typically involve dedicated organisations or programmes that promote strategic collaborative development within specific agglomerations through projects and actions related to i) strategic planning and vision development; ii) innovation and technology support; iii) skills development and training; iv) market development and internationalisation; v) infrastructure and shared facilities; vi) policy advocacy and regulatory improvement; and vii) interfirm networking and knowledge exchange (Llinás, 2021[31]).
For LAC countries, cluster and other productive articulation initiatives offer particularly valuable tools for implementing PDPs within the institutional and resource constraints that often characterise the region. They provide ways to mobilise resources more effectively through better co‑ordination, focus limited public resources on strategic priorities with high potential returns and build implementation capabilities through learning-by-doing in specific contexts. Examples include Brazil’s automotive cluster in the ABC Region of São Paulo, Chile’s wine cluster in regions that have successfully leveraged collective action for international market penetration, Colombia's multiple cluster initiatives sponsored by the chambers of commerce and Costa Rica's medical device cluster supported by PROCOMER (CINDE, 2023[59]).
A renewed vision for LAC should prioritise the design and implementation of well-structured and effectively governed cluster and other productive articulation initiatives that align with the region’s strategic development priorities and leverage local strengths and opportunities (Llinás, 2021[31]; OECD, 2007[60]).
Cluster development should embrace a pragmatic, experimental approach rather than waiting for perfect conditions or complete institutional frameworks (Sabel and Zeitlin, 2010[49]; Andrews, Pritchett and Woolcock, 2017[50]). The most effective strategy is to begin cluster initiatives based on existing capabilities and learn through implementation, gradually scaling up and strengthening supporting institutions over time (Porter, 1998[61]). This learning-by-doing approach recognises that cluster formation is an iterative process where initial experiments provide valuable insights for subsequent developments and broader institutional improvements (Llinás, 2021[31]). Policymakers should first focus on identifying which clusters to prioritise based on strategic potential. They should then commence implementation while maintaining flexibility to adapt and expand based on results and emerging opportunities (Ketels, 2003[62]; ECLAC, 2024[11]).
Diagnostic frameworks for root-cause analysis
Effective PDPs require sophisticated diagnostic frameworks that can identify the root causes – the binding constraints – of productive development challenges rather than merely addressing their symptoms (Rodrik, 2004[34]; Hausmann, Rodrik and Velasco, 2005[63]). LAC countries have employed various analytical approaches to understand the fundamental constraints limiting production transformation, from growth diagnostics to value-chain analysis, innovation system assessments and territorial competitiveness studies (ECLAC, 2024[21]; IDB, 2010[4]). While these different methodologies offer valuable insights, there is a need for integrated approaches that can capture the complex interactions between institutional, structural and market factors.
Root-cause analysis must operate at multiple levels simultaneously, examining how national-level institutional frameworks interact with territorial characteristics, sectoral dynamics and firm-level capabilities (OECD et al., 2019[5]). This requires diagnostic processes that can systematically identify where constraints are most binding and where policy interventions are likely to generate the greatest impact on sustainable development outcomes.
The ultimate test of diagnostic frameworks is their ability to inform strategic prioritisation and policy design (Andrews, Pritchett and Woolcock, 2017[50]). Effective root-cause analysis should lead to clear hypotheses about which interventions will address fundamental constraints rather than peripheral issues, enabling policymakers to focus scarce resources on high-impact areas that can unlock broader production transformation.
The OECD together with the UN system provides tailored support through the Production Transformation Policy Review (PTPR) to countries aiming at fostering structural change and reap the benefits of new technological frontiers through a system review of countries potential across several policy dimensions.
The PTPRs propose an interpretative framework for assessment and recommendation which takes into account the characteristics of the global economic landscape in which countries are embracing production transformation strategies as the starting point of the analysis. The PTPRs focus on assessing countries’ capabilities and potential in five domains (Anticipation capacity, Adaptation Capacity, Learning and Upgrading Potential, Interconnectedness Propensity and Embeddedness Potential). These five pillars derive from the recognition that there is no unique model of development. Countries develop and achieve upgrading in a variety of ways. Their performance is determined by a mix of internal and external factors and by the effectiveness of the mix of existing capabilities. The PTPR framework has been implemented in the Latin American and Caribbean region in Chile, Colombia Costa Rica and the Dominican Republic.
In particular, in the current economic landscape, five features have been identified as distinctive in explaining the success of the capacity of economic systems:
The capacity to be forward-looking
The capacity to be flexible and react to changing circumstances
The capacity to activate learning dynamics and to engender self-discovery processes
The capacity to deal with increasingly complex networks
The capacity to create resilient linkages and create/retain value.
Based on the features identified above, the PTPRs focus on assessing countries’ readiness and potential for transformative change taking into account countries’ specificities and international benchmarking. Figure 2.4 illustrates the five-pillar based framework for the PTPR that is used in this review.
The landscape of PDPs in LAC exhibits considerable diversity, reflecting differences in country size, economic structure, institutional capacity, political orientation and historical development patterns (ECLAC, 2014[65]; ECLAC, 2024[11]). While the region's history includes periods of state-led industrialisation with a strong emphasis on import substitution, the latter decades of the 20th century saw a general shift towards more market-oriented policies and a reduction in direct state intervention in the economy (Williamson, 1990[66]). However, there has been a discernible resurgence of more active and targeted PDPs across the region in recent years, influenced by global trends and in response to the challenges outlined in this chapter’s Introduction.
LAC’s fiscal efforts in terms of productive development policies
The fiscal resources allocated to PDPs in LAC have typically been modest compared to international benchmarks, particularly those of East Asian and advanced economies. According to ECLAC estimates, LAC countries dedicate less than 0.5% of gross domestic product (GDP) to explicit PDPs, excluding infrastructure investments and general education spending (Figure 2.5). This contrasts with figures of more than 3% in many OECD countries and with even higher levels in countries like South Korea during their intensive industrialisation phases (Lane, 2025[67]).
Note: The figures for Latin America and the Caribbean refer to the 2021–2022 average. For the OECD to 2021 (excluding the agricultural sector).
Source: Authors’ elaboration based on (ECLAC, 2024[11]).
The composition of this spending also reveals important patterns. A significant portion of PDP expenditure in the LAC region goes to horizontal policies and general business support, with more limited resources allocated to strategic vertical initiatives. Within horizontal spending, the largest share typically finances business services, general SME support and entrepreneurship programmes, while innovation financing, advanced technology adoption and supplier development programmes tend to receive more modest allocations despite their potential strategic importance (ECLAC, 2022).
The distribution of fiscal resources across different types of instruments also shows distinctive patterns. Direct subsidies and tax incentives often absorb substantial resources, but they frequently lack robust evaluation mechanisms to assess their effectiveness. Public procurement, which has been used strategically for productive development in many successful cases internationally, remains underutilised as a PDP instrument in most LAC countries. Under this new vision for PDPs, the role of development banks should go beyond traditional lending to include a market intelligence function that helps identify bottlenecks hindering the production transformation of economies (Fernández-Arias, Hausmann and Panizza, 2019[68]).
An important characteristic of PDP financing in the region is its volatility. Funding levels often fluctuate significantly with political cycles and macroeconomic conditions, undermining the long-term perspective required for successful production transformation. This volatility affects not only the overall resource envelope but also the relative priorities within PDP budgets, with strategic long-term initiatives frequently sacrificed during fiscal adjustment periods.
The COVID-19 pandemic influenced PDP financing patterns across the region, with initial emergency support for businesses gradually giving way to more strategic recovery initiatives in many countries. However, the fiscal pressures intensified by the pandemic have generally constrained the resources available for ambitious new PDP programmes, with notable exceptions in larger economies like Brazil and Mexico (Chapter 3).
Governance for productive development policies in LAC
The governance arrangements for PDPs in LAC display significant variation across countries, reflecting different institutional traditions, administrative structures, policy approaches and institutional capacities. Nevertheless, several common challenges and emerging patterns can be identified.
At the national level, responsibility for PDPs is typically distributed across multiple ministries and agencies: i) ministries of the economy, industry or production; ii) agencies for STI; iii) organisations for export promotion and investment attraction; iv) development banks and financial institutions; v) specialised sectoral agencies, e.g. for agriculture, tourism or mining; and vi) education and labour ministries involved in skills development. In Chile, for instance, CORFO works alongside the Ministry of Economy, InvestChile and various sectoral agencies. In Colombia, the Ministry of Commerce, Industry and Tourism co‑ordinates with entities like Bancóldex, ProColombia and Innpulsa. In Mexico, the Ministry of Economy co‑ordinates with Nacional Financiera, ProMéxico (until 2019) and state-level development agencies.
Across 33 countries in the region, there are 197 ministerial entities involved in PDPs, covering the following areas of activity: agriculture; fishing; tourism; industry; micro-, small and medium-sized enterprises; foreign trade; STI; ICT; and employment. About two-thirds of these countries have five or six different ministries engaged in PDPs. While multisectoral ministries are the most common, their presence does not automatically result in coherent co‑ordination mechanisms or a unified strategic direction (Figure 2.6).
Note: The graph illustrates the fragmentation of government agencies responsible for overseeing PDPs in LAC. Institutions intervening in PDPs are divided into four categories, depending on their level of specialisation: i) Sectoral ministries: Ministries dedicated exclusively to a specific sector or function related to productive development (e.g. tourism or employment). ii) Multisectoral ministries: Ministries that operate across multiple areas connected to productive development (e.g. a ministry responsible for both tourism and agriculture). iii) Supra-ministries: Ministries that, in addition to managing at least one area of productive development, also perform broader functions that extend beyond this sphere, such as addressing social, macroeconomic, or other cross-cutting issues. iv) Specialised bodies: Technical institutions (such as agencies, services, or institutes) focused on specific aspects of PDPs.
Source: Authors’ elaboration based on (ECLAC, 2024[11]).
This dispersion across different entities manifests in several critical ways. The first is misalignment between instruments and priorities: many PDP instruments are not clearly linked to strategic goals or to identified driving sectors, weakening their transformative potential. The second is fragmented public spending: resources are spread across numerous programmes and institutions, which dilutes their impact and increases administrative burdens (OECD/UNCTAD/ECLAC, 2020[64]). The third is weak governance frameworks: among the 74 co‑ordination bodies identified in 15 countries, most are consultative in nature, lacking executive or deliberative powers, while only 28% have multilevel operations, limiting territorial and subnational engagement (ECLAC, 2024[11]). The final way dispersion manifests is in lack of self-identification: many public agencies do not identify themselves as part of the PDP ecosystem, hindering collective action and joint planning.
This institutional fragmentation creates co‑ordination challenges that many countries have attempted to address through mechanisms including interministerial committees, specialised productive development councils or designated co‑ordinating agencies. The effectiveness of these co‑ordination mechanisms varies considerably, with stronger arrangements typically featuring clear mandates, dedicated technical capabilities, appropriate stakeholder representation and direct connections to centres of political authority.
The current landscape of co‑ordination in LAC also reveals structural limitations. Across 15 countries, 74 co‑ordination bodies were identified. While this shows a growing institutional awareness of the need for co‑ordination, challenges remain. First, most co‑ordination bodies are consultative (95%). 41% of these platforms primarily offer advice or recommendations, and only few possess executive or deliberative authority (14%): they cannot directly enforce or allocate resources, which limits their effectiveness (Figure 2.7). Second, there is limited multilevel co‑ordination. Only 28% of the co‑ordination bodies operate across different levels of government, reflecting a deficit in territorial governance that impedes the articulation between national and subnational efforts and weakens place-based policy approaches. Third, while public-private collaboration is emerging, it is fragile. Around 57% of the co‑ordination bodies include private-sector representatives, but their influence is often restricted to advisory roles, and structured dialogue mechanisms remain underdeveloped (ECLAC, 2024[11]). Fourth, there is a lack of continuity and stability. Many co‑ordination bodies are vulnerable to changes in political leadership or institutional restructuring, which undermines policy continuity and the accumulation of institutional learning.
Note: The information is based on data from 15 LAC countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay Peru, and Uruguay.
Source: Authors’ elaboration based on (ECLAC, 2024[11]).
An institutional option worth considering – especially in contexts of persistent fragmentation and weak policy alignment – is the establishment of a leading agency for productive development, with a strong political mandate, clear co‑ordination authority and operational capabilities. Drawing inspiration from successful experiences with institutions such as Japan’s Ministry of International Trade and Industry, Korea’s Ministry of Trade, Industry and Energy or Malaysia’s Performance Management and Delivery Unit (PEMANDU), such leading agencies can serve as central nodes in the PDP ecosystem. PEMANDU illustrates how a delivery-focused agency closely tied to the executive branch can co‑ordinate complex reforms, monitor implementation and foster accountability across sectors. The function of a leading agency is not to substitute for existing institutions but to align and orchestrate the strategic direction, resource allocation and performance monitoring of PDPs across sectors and levels of government. Although the institutional form must be adapted to each country’s political and administrative context, key success factors include insulation from political volatility, technical excellence, interministerial authority and strong links to the executive branch. Some LAC countries could benefit from piloting such models, particularly in the context of national production transformation strategies.
Public-private dialogue mechanisms constitute an important element of PDP governance in the region. Many countries have established formal councils or forums bringing together government officials, business representatives and other stakeholders to inform policy design and implementation. These range from high-level advisory bodies with broad mandates to technical working groups focused on specific sectors or issues. The effectiveness of these mechanisms depends on factors such as breadth of representation, technical capacity, operational continuity and influence on decision making processes. Private institutions such as the Consejos Privados de Competitividad play a crucial role as well.
An emerging trend in several LAC countries is the development of more collaborative and distributed governance arrangements that go beyond traditional hierarchical models. These approaches, aligned with the experimental governance principles discussed above, involve networks of public, social, private and academic actors engaged in ongoing processes of goalsetting, implementation, evaluation and adaptation.
Despite these positive developments, significant governance challenges persist in many LAC countries. They include vulnerability to political cycles and discontinuity, limited technical and analytical capabilities within key agencies, insufficient monitoring and evaluation mechanisms, co‑ordination difficulties across government levels and agencies, and challenges in ensuring balanced stakeholder representation that avoids capture by powerful interests.
Productive development policy efforts at the subnational level in LAC
The territorial dimension of PDPs has gained increasing attention in LAC, with growing recognition of the important role that subnational governments and local stakeholders play in productive development processes. This shift reflects both the decentralisation processes that have occurred across much of the region and the increasing awareness of place-based factors in productive development (Salazar-Xirinachs and Llinás, 2023[22]).
Subnational PDP efforts in LAC comprise i) regional development plans with productivity and competitiveness components; ii) state or provincial innovation systems and technology policies; iii) local economic development initiatives led by municipalities or departmental governments; iv) territorial cluster programmes focusing on specific local specialisations; v) regional skills development strategies aligned with local production structures; and vi) subnational investment promotion and business attraction efforts. Notable examples of advanced subnational PDP approaches in the region include i) the state innovation systems in Brazil, particularly São Paulo's FAPESP system, Minas Gerais’s innovation networks and Santa Catarina's technology parks; ii) provincial cluster initiatives in Argentina, such as Córdoba's automotive and aeronautical clusters; iii) regional competitiveness commissions in Colombia, including Antioquia's innovation ecosystem and Valle del Cauca's biotechnology initiatives; and iv) state-level strategic projects in Mexico, such as Jalisco's digital creative city programme and Nuevo León's aerospace cluster development.
The scale and effectiveness of these subnational initiatives vary considerably across the region and within countries, influenced by factors such as decentralisation frameworks, fiscal and technical capacities, and co‑ordination mechanisms.
There are significant differences in the level of effort dedicated to PDPs within countries. In Argentina, for example, provincial governments allocated an average of 1.8% of their budgets to productive development in 2022, but this figure ranged from less than 0.5% in some provinces to more than 4% in others (Figure 2.8, Panel A). Similarly, in Uruguay, the departmental development offices accounted for an average of 2% of intermediate government spending across 17 of 19 departments, reflecting a level of effort comparable to that of Argentina’s provinces (Figure 2.8, Panel B). These disparities highlight the importance of considering subnational dynamics when designing and implementing productive development strategies.
Note: The information for Argentina refers to the year 2022 while for Uruguay it’s a simple average between 2016 and 2018.
Source: Authors’ elaboration based on (ECLAC, 2024[11]).
The legal distribution of responsibilities and resources across government levels shapes the scope for subnational PDP action in the cases of decentralised administrations. Federal countries like Argentina, Brazil and Mexico typically provide greater formal autonomy to subnational governments, while subnational PDP roles are often more constrained in more centralised countries.
Table 2.1 illustrates how different PDP responsibilities are distributed in LAC across three levels of government: national, intermediate and local. The table shows a clear pattern of specialisation and overlapping responsibilities. The national government has the broadest mandate, covering all 16 policy areas listed, from international relations to entrepreneurship. The intermediate government is involved in 11 policy areas, focusing more on territorial aspects like clusters, SMEs, education and agriculture. The local government has the most specialised role, participating in 8 policy areas that are closest to local economic development: technical education, technological capabilities, agriculture, tourism, microenterprises and entrepreneurship.
This table illustrates a key point about decentralisation frameworks in PDPs. The distribution of responsibilities across government levels shapes the scope for subnational PDP action. The table shows how federal countries might allocate responsibilities, providing greater formal autonomy to subnational governments while maintaining certain exclusive domains for the national government.
The specialisation pattern also reveals a principle of subsidiarity: functions like international relations and major infrastructure remain at the national level, while implementation of more localised economic development initiatives can be managed at intermediate and local levels. This multilevel governance approach allows for co‑ordination of national strategies and for adaptation to local contexts and needs.
This pattern helps explain why the effectiveness of subnational PDPs varies significantly depending on a country's decentralisation framework and the specific distribution, in addition to responsibilities, of resources and decision-making authority across government levels.
With regard to fiscal and technical capacities, subnational governments' ability to finance PDP initiatives depends on their revenue sources, transfer systems and borrowing capabilities, which differ markedly across the region. Larger and wealthier subnational units generally have greater fiscal capacity for PDP investments. Moreover, the effectiveness of subnational PDPs is strongly influenced by the technical and administrative capabilities of subnational governments and local stakeholders. These capabilities tend to be concentrated in more developed regions, potentially reinforcing territorial inequalities without appropriate capacity-building efforts.
The story of how intermediate governments in Latin America pursue productive development reveals both shared patterns and striking divergences. An analysis of Argentina, Mexico and Uruguay in 2023 uncovered a nuanced landscape where historical trajectories, institutional capacities and development visions shape widely different approaches at the subnational level (ECLAC, 2024[11]).
Across the region, subsidies emerge as the universal language of PDP, embraced by nearly all intermediate governments (98% in Argentina, 100% in Mexico and 95% in Uruguay) (Table 2.2). This widespread reliance on direct financial support reflects a common understanding of the need to address market failures and stimulate economic activity through immediate interventions. However, beyond this shared foundation, the architecture of the PDPs varies considerably across national contexts.
Notably absent across all three countries are regulatory bodies at the intermediate government level. Their total absence reveals a pan-regional institutional gap in the governance architecture for productive development. It also raises important questions about the national-local co‑ordination of quality standards, certification processes and other regulatory functions essential for upgrading production structures.
These findings take on deeper significance when viewed against the backdrop of territorial inequality. This research indicates that, paradoxically, territories with lower per capita GDP often dedicate proportionally more of their budgets to PDPs. However, these relative efforts translate into insufficient absolute investments to close productivity gaps with wealthier territories. This creates a development trap where the territories most in need of production transformation are precisely those with the fewest resources to implement comprehensive PDP strategies (Chapter 3).
The diversity of PDP instruments suggests significant opportunities for cross-learning among Latin American territories. By understanding different approaches, intermediate governments can potentially expand their policy toolkits and develop more comprehensive strategies tailored to their specific contexts and challenges.
Finally, the impact of subnational PDPs depends significantly on effective co‑ordination, both horizontally, across local stakeholders, and vertically, with national policies and programmes. A particular challenge for subnational PDPs is the pronounced heterogeneity in capabilities and resources across territories within countries in LAC. Metropolitan regions and more developed states or provinces typically have greater capacity to design and implement sophisticated PDP initiatives, while less developed regions often lack the basic capabilities and resources required. This creates the risk that decentralised approaches to PDPs may exacerbate rather than reduce territorial inequalities without appropriate support mechanisms and capacity-building efforts.
Strategic pillars for production transformation in LAC
In the context of a renewed vision for PDPs in LAC, certain strategic pillars have emerged as critical levers for fostering structural transformation, productivity growth and long-term competitiveness. These pillars are digital transformation, STI, skills development and productive articulation initiatives, such as clusters. These dimensions converge around the need to build robust ecosystems that support technological upgrading, sectoral diversification and territorial cohesion. This subsection outlines the core components of each of these pillars and highlights their contribution to an integrated, inclusive and sustainable productive development agenda across the region.
Digital transformation efforts under productive development policies
Digital transformation of the production sector has become a strategic priority for countries seeking to enhance competitiveness, innovation and sustainable development. In LAC, where structural challenges such as low productivity, limited innovation and economic concentration persist (Chapter 1), productive digitalisation – the systematic integration of advanced digital technologies into productive processes – represents a critical opportunity to drive production transformation and close historical development gaps. This concerns both basic digital technologies, such as enterprise resource planning systems, customer relationship management platforms, e-commerce websites or digital payment systems, and more advanced digital solutions, such as artificial intelligence, big data, the Internet of Things, robotics and cloud computing. At present, there is a significant gap between the adoption of basic digital technologies and more advanced ones. Around 50% of LAC companies have access to high-speed broadband, while only about 10% use AI solutions. Furthermore, the benefits of digitalisation are not automatic. They require deliberate public policies that ensure inclusiveness, mitigate regional disparities and strengthen productive capacities (OECD/UNCTAD/ECLAC, 2020[64]).
The range of policies and initiatives developed by countries in the region to promote productive digitalisation can be grouped into the following areas:
Access to financing. Direct funding programmes and grants are widely used to support the adoption of digital technologies, particularly by micro-, small and medium-sized enterprises. An example is Uruguay's co-financing mechanisms provided by the National Development Agency through its digital transformation programme, Modo Digital (Chapter 3).
Skills development and human capital formation. Specialised training programmes aim to strengthen digital skills within the workforce, focusing on advanced technical competencies. Initiatives such as Chile’s Digitaliza tu Pyme seek to enhance business-level and territorial capacities. Inclusiveness including as regards to gender imbalances is important in this domain.
Technical assistance and advisory services. Countries offer structured technical advisory services to guide companies through their digitalisation processes. In Colombia’s Digital Ecosystems initiatives, led by the Ministry of Information and Communications Technologies, expert advice, mentoring and support for productive linkages are key components.
Tax and financial incentives for innovation. Some policies provide fiscal incentives to encourage investment in digital technologies and innovation, reducing the costs associated with technological adoption for firms.
Business networking and ecosystem development. Efforts to foster collaborative innovation ecosystems, such as business clusters and digital platforms, are gaining ground. These mechanisms aim to create synergies among companies, universities, research centres and public institutions.
Sector-specific digitalisation strategies. Beyond horizontal measures, countries are promoting digitalisation in strategic sectors such as agriculture, manufacturing, mining and energy to modernise production chains and increase value added (ECLAC, 2025[69]).
Despite notable progress, significant challenges remain in consolidating a coherent and impactful approach to productive digitalisation. The effectiveness of current efforts is constrained by i) fragmented institutional arrangements; ii) lack of a proper regulatory framework; iii) lack of comprehensive roadmaps with clear targets and dedicated resources; iv) limited private-sector participation in policymaking; v) weak digital infrastructure in non-urban areas; and vi) persistent gaps in advanced digital skills. Strengthening productive digital transformation policies requires adopting integrated national strategies, reinforcing multilevel governance and intersectoral co‑ordination, promoting public-private partnerships and focusing on sectors with high potential for digital value creation. Only through a more systemic and inclusive approach can LAC leverage digitalisation to achieve sustainable and equitable productive development.
Science, technology and innovation for productive development in LAC
Science, technology and innovation (STI) are widely acknowledged as the fundamental engines of long-term productivity growth, structural transformation and sustainable development (Freeman, 1995[70]). Recognising this, many LAC countries have implemented policies and established institutions aimed at strengthening their national STI ecosystems. These efforts can be broadly grouped into five key areas (ECLAC, 2025 forthcoming[71]):
Research and development. LAC governments have increased public investment in R&D through support for national research institutions, universities and public-private collaborative projects. National science and technology councils, along with dedicated funding agencies, play a central role in financing and co‑ordinating these efforts,
Innovation. To stimulate innovation in the private sector, various countries have introduced financial incentives, primarily in the form of grants for innovation projects and in a few cases through R&D tax incentives. These initiatives aim to encourage firms to develop new products, processes and services and to adopt emerging technologies to improve competitiveness.
Talent development. Recognising the importance of human capital, policies have also focused on strengthening the supply of highly skilled researchers, engineers and technical professionals. This includes investment in postgraduate education, training in science, technology, engineering and mathematics, and programmes to retain and attract talent.
Knowledge and technology transfer. Countries are promoting stronger links among academia, industry and government through mechanisms that support technology transfer and commercialisation. These mechanisms include research collaboration platforms, intellectual property frameworks, science parks and incubators that help translate scientific discoveries into market-ready innovations.
Entrepreneurship. Some governments have supported entrepreneurship by fostering the creation and growth of innovative start-ups. This includes initiatives such as seed funding, accelerators, mentoring networks and innovation hubs, particularly for early-stage, technology-based ventures.
Despite these efforts, overall investment in STI, both public and private, generally remains low as a percentage of GDP in LAC compared to more developed economies and some Asian countries (ECLAC, 2024[26]).
In addition, while countries in the region have generally made progress in their STI policies, there is also considerable heterogeneity, with some systems being very mature and others lacking capacity for policy design and implementation. For example, regarding the institutional architecture of STI policies in the region, only 21% of countries have specialised structures for both governance and implementation; 12% have a dedicated STI authority but no separate implementing agencies; another 21% combine governing bodies with shared responsibilities and technical implementing agencies; and the remaining 46%, mostly Caribbean Islands states, have less specialised structures with limited capacity. In addition, the budget allocations of leading STI institutions show a trend of stagnation or relative decline in funding. While the impact of STI policies is not determined solely by the volume of resources, this funding gap limits their effectiveness, particularly in terms of supporting productive development (ECLAC, 2025[58]).
Furthermore, the impact of STI policies is often limited by weaknesses in the broader innovation ecosystem, such as a shortage of highly skilled researchers and technicians, limited collaboration and knowledge sharing between different actors, challenges in accessing venture capital and other forms of risk finance, and difficulties in translating research findings into marketable products and services. Strengthening the STI ecosystem and fostering a vibrant culture of innovation are critical prerequisites for enhancing the effectiveness of PDPs in driving long-term productive development in LAC.
Skills development for productive development policies
Bridging skills gaps across all levels is a crucial and cross-cutting element for the success of a renewed vision for PDPs in LAC. Many countries in the region are implementing skills development programmes aimed at addressing the evolving needs of the labour market, supporting structural transformation and enhancing the employability of their populations (ILO, 2020[72]). These initiatives often include:
Strengthening foundational skills in areas such as literacy, numeracy and digital literacy, as these form the basis for acquiring more advanced skills (UNESCO, 2022[73]).
Providing high-quality technical and vocational education and training programmes that are aligned with the current and future skills demands of key industries and emerging sectors, often in collaboration with the private sector in curriculum development and delivery (OIT-CINTERFOR, 2017[74]).
Supporting workers to adapt to technological changes, acquire new skills needed for evolving job roles and transition to new sectors through adult education and training programmes (OECD, 2019[75]).
Ensuring that curricula are relevant to industry needs through linkages between education and training providers and the private sector, using mechanisms such as internships, apprenticeships and employer involvement in curriculum design, and ensuring that graduates possess the skills and competencies demanded by employers (IDB, 2018[76]).
Enhancing the capacity of the education and training system to deliver high-quality and up-to-date programmes through investments in teacher training, modernisation of infrastructure for skills development and relevant learning technologies (ECLAC, 2020[10]).
Developing national qualifications frameworks by establishing clear standards for skills and competencies across different occupations and sectors to improve the recognition and portability of skills and facilitate labour mobility (ILO, 2016[77]).
Addressing the persistent and multifaceted skills gaps in LAC requires a comprehensive, co‑ordinated and demand-driven approach involving close collaboration among education and training institutions, employers, labour organisations and government agencies. PDPs must integrate skills development as a central and strategic component, ensuring that the workforce has the necessary skills to support productive upgrading, diversification and the adoption of new technologies. If approached in an inclusive manner, this can also have spillover effects in inequality reduction through higher value employment.
Cluster and other productive articulation initiatives in LAC
Clusters and other productive articulation initiatives are widespread across LAC and represent a powerful tool for subnational governments to promote productive development within their territories (ECLAC, 2024[21]). These initiatives aim to foster collaboration in the networking of knowledge sharing among firms, research institutions, government agencies and other related stakeholders within geographically concentrated areas or around specific value chains. As of 2023, the virtual Productive Articulation Initiatives Platform developed by ECLAC had identified nearly 400 PAIs operating in 16 countries across the region (ECLAC, 2023[78]). The platform’s information is complemented by ECLAC’s ad hoc data collection efforts in Brazil, the Caribbean and Mexico, bringing the total number of identified PAIs to 712.1 These initiatives are primarily concentrated in the sectors of agriculture (34.8%), manufacturing (26.4%), tourism (9.8%), ICT (7.2%) and trade (6.6%). Notable examples include Argentina’s knowledge economy clusters in Cordoba, Brazil's Aerospace and Defence Cluster in São Paulo, Chile’s tourism cluster initiatives in various regions, Colombia’s digital cluster initiatives in various departments, Costa Rica’s medical device cluster in the Central Valley and Mexico’s automotive clusters in Queretaro and northern states.
The primary objectives of cluster initiatives include:
Enhancing innovation and technology adoption by facilitating knowledge spillovers, collaborative R&D projects, and the diffusion of new technologies and best practices among cluster members (Porter, 1998[61]).
Improving access to specialised inputs, services and infrastructure by fostering the development of local supplier networks, specialised business support organisations and shared infrastructure that benefits cluster firms (Schmitz, 1995[79]).
Strengthening market access and export promotion by promoting joint marketing efforts, facilitating the formation of export consortia and enhancing the collective visibility and reputation of the cluster in domestic and international markets (Ketels, 2003[62]).
Developing specialised skills and talent by supporting the creation of training programmes and educational offerings that are tailored to the specific skill needs of the cluster industries, often in collaboration with local educational institutions.
Improving the business environment by advocating policies, regulations and public investments that support the growth and competitiveness of the cluster and address common challenges faced by its members.
The PAIs identified in LAC primarily aim, on average, to gain access to new markets (22%), strengthen productive linkages (15%), improve commercial offerings (12%), reduce gaps within the productive sector (8%), and foster process or product innovation (8%) (Figure 2.9).
Note: Data from 16 LAC countries and 497 productive articulation initiatives for which this variable is available.
Source: Authors’ elaboration based on (ECLAC, 2023[78]) and on ad hoc research conducted in Brazil, the Caribbean and Mexico.
Given the significant number of PAIs in the region, encompassing more than 50 000 companies, these initiatives hold strong potential to drive the formulation and implementation of concrete strategic agendas aligned with territorial productive priorities. They can serve as key mechanisms to articulate, operationalise and materialise national and subnational PDPs, while also scaling up the adoption of strategies aligned with a more inclusive and sustainable development model (ECLAC, 2024[11]).
Competition policy and market development for productive development policies
Competition policy represents a crucial but often overlooked pillar of effective productive development strategies in LAC (Rodrik, 2004[34]; ECLAC, 2024[21]). The relationship between competition, diversification, innovation and productivity growth is fundamental to successful production transformation. It requires policies that foster competitive dynamics at the domestic and international levels. The following aspects must be considered:
Domestic competition as a driver of innovation. While export markets provide essential competitive pressure through global competition, robust domestic competition is equally important for driving innovation and efficiency improvements (Porter, 1998[61]) (Nelson and Winter, 1982[27]). Local competitive dynamics force firms to continuously improve their products, processes and services, creating the foundation for later success in international markets. PDPs must therefore include measures to strengthen competition policy, reduce entry barriers and prevent the emergence of protected domestic monopolies that stifle innovation (ECLAC, 2024[11]).
Industry-wide versus firm-specific approaches. Effective PDPs recognise that governments cannot and should not attempt to pick individual winning firms within sectors (Rodrik, 2004[34]; Evans, 1995[35]). Instead, policies should focus on strengthening entire industries and value chains, allowing competitive market forces to determine which firms succeed (Porter, 1998[61]; Warwick, 2013[48]). This approach reduces the risk of government capture while ensuring that support reaches the most efficient and innovative firms within supported sectors (ECLAC, 2014[65]).
Avoidance of past mistakes. The region’s experience with import substitution industrialisation demonstrates the risks of protecting domestic industries from competitive pressure for extended periods (Prebisch, 1950[28]; Prebisch, 1959[80]; Williamson, 1990[66]). Modern PDPs must incorporate competitive discipline from the outset, ensuring that supported sectors face appropriate market pressures and performance requirements to avoid creating permanently dependent industries (Lin and Chang, 2009[25]; ECLAC, 2024[11]).
This competitive dimension must be integrated into all aspects of PDP, from sector selection and firm support to performance evaluation and policy adjustment mechanisms.
Current productive development policies in LAC: Strategies, approaches and agendas
LAC countries face common structural challenges in their productive development: middle-income traps, commodity dependence, limited participation in higher value-added segments of global value chains, productivity gaps and persistent inequality. However, in terms of their strategic responses to these challenges, there is significant divergence in policy approaches, institutional frameworks and development visions.
A comparative analysis of PDPs in selected LAC countries provides valuable insights into these diverse approaches and the challenges and successes encountered. Table 2.3 presents a comparison of PDPs across seven representative countries of the region. This diverse policy landscape reflects not only different ideological orientations and national contexts but also lessons learned from past experience and adaptations to a rapidly transforming global environment.
Note:
1. Argentina’s approach, focusing on market liberalisation rather than active productive development intervention, represents a departure from what are considered productive development policies. It is included for comparative purposes to illustrate the full spectrum of economic policy approaches in the region.
Source: Authors’ elaboration based on official information (March 2025).
Productive development approaches in LAC
In the mosaic of strategies across the region, several patterns emerge that characterise the various national approaches. These are not pure models but predominant tendencies that coexist with elements from other approaches.
The state-led model with sectoral focus
The most emblematic example of this approach is Brazil, where the state plays a leading role in defining and promoting strategic sectors. Through its Nova Indústria Brasil policy (2023-2026) and the Brasil Mais Productivo programme, the country has sought to revitalise its industrial base with a combination of instruments, including preferential financing through the Brazilian Development Bank (BNDES), comprehensive SME support programmes via the Support Service for Micro and Small Enterprises (SEBRAE) and a simplified tax regime (Simples). Brazil’s approach is distinguished by the integration of the country’s Ecological Transition Plan, co‑ordinated by the Ministry of Finance. This represents a paradigmatic shift towards mainstreaming environmental considerations within the country’s broader economic and productive development strategy (Ministry of Finance, Brazil, 2023). Brazil’s new industrial policy, more sophisticated than previous versions, incorporates environmental sustainability criteria by linking productive development credits to environmental, social and governance metrics. The Ecological Transition Plan establishes concrete mechanisms for aligning fiscal policy, public investment and productive development incentives with climate and environmental objectives, creating synergies between decarbonisation goals and industrial competitiveness that extend beyond traditional sectoral approaches. This distinctive element represents a significant innovation in the region. It seeks to harmonise competitiveness objectives with sustainability through an integrated governance framework that positions environmental transition as a driver of production transformation, rather than a constraint.
Colombia has also shifted towards a more active state role with its Reindustrialisation Policy (2023). The policy aims to increase the generation of added value in the production of goods and services in the economic sectors that make up the productive base of the Colombian economy, in order to transition from an economy dependent on extractive activities to a knowledge-based, productive, sustainable and inclusive economy that contributes to territorial development and the closing of productivity gaps. Unlike past import substitution experiences, this new approach includes modern elements such as “Buy Colombian” procurement policies, national production incentives and strategic use of trade instruments to support domestic manufacturing. Parallel to this industrial policy, Colombia has implemented an ambitious STI Mission-Oriented Policy, co‑ordinated by the Ministry of Science, Technology and Innovation (Minciencias), that seeks to address major societal challenges through targeted research and innovation programmes. While both policies represent sophisticated approaches to state intervention, they operate largely independently, with limited co‑ordination mechanisms between the productive development agenda and the mission-oriented innovation strategy. This highlights a challenge in policy integration that affects many LAC countries.
The trade and foreign investment-oriented model
Mexico exemplifies a strategy centred on trade integration and FDI attraction. Its current productive strategy is strongly anchored in leveraging the United States-Mexico-Canada Agreement (USMCA) and the nearshoring phenomenon as development engines. The Plan México (2025) and the USMCA Integration Strategy seek to maximise the benefits of North American production-chain relocation, consolidating Mexico as a manufacturing hub. The approach is characterised by a strong orientation towards external markets, especially the United States, with priority sectors aligned with North American value chains. Under Plan México, the government has identified eight strategic priority sectors: automotive, aerospace, electronics, agro-industry, semiconductors, electromobility, pharmaceuticals and textiles. This expanded sectoral focus reflects Mexico's strategy to capitalise on nearshoring opportunities while diversifying beyond traditional manufacturing sectors, particularly emphasising emerging industries such as semiconductors and electromobility that align with North American supply-chain reconfiguration and the green transition.
The Dominican Republic follows a similar pattern on a smaller scale. The country is transitioning from a free-zone-based model towards a more integrated economy, while maintaining a strong emphasis on FDI attraction, especially in tourism, manufacturing and, more recently, the film industry as an emerging sector.
Costa Rica has refined this model with particular success, evolving from light manufacturing towards knowledge-intensive sectors such as medical devices, information technology services and advanced manufacturing. Its Digital Transformation Strategy 2022-27 complements these efforts with notable technology adoption.
The market-oriented model with selective intervention
Chile represents the paradigm of a market-oriented economy that has incorporated strategic interventions in specific sectors. Its National Green Hydrogen Strategy and National Lithium Strategy exemplify this approach: the state establishes regulatory and strategic frameworks but relies on the private sector and market mechanisms for implementation. Chile's Productivity, Innovation, and Growth Agenda articulates selective interventions through agencies like the Production Development Corporation (CORFO) and programmes like Start-Up Chile, while maintaining a general pro-market regime. This model has allowed Chile to develop capabilities in services, world-class mining and, increasingly, renewable energy. Its recent 4e Program reflects an attempt to diversify towards high-technology sectors.
Uruguay follows a similar path with a knowledge-intensive approach and emphasis on innovation and sustainability. Its Strategic Plan Uruguay 2050 and National Innovation Strategy articulate a knowledge-based development vision, with selective interventions in sectors such as agri-tech, ICT services and sustainable agriculture.
The radical liberalisation model
Argentina represents a particular case with its Economic Liberalisation Plan (2023-present) and the so‑called Chainsaw Plan for deregulation. This approach seeks to minimise state intervention in productive sectors, eliminate industrial subsidies, reduce trade barriers and privatise state enterprises. It prioritises macroeconomic stabilisation over sectoral intervention, with distinctive elements such as an exploration of dollarisation and the elimination of export taxes.
The nature and objectives of this strategy – focused primarily on fiscal adjustment, market liberalisation and the withdrawal of the state from productive affairs – make it difficult to classify it as a PDP in the traditional sense. Nonetheless, while recognising that the case of Argentina represents an alternative development philosophy rather than a PDP variant, it is included for analytical completeness in order to illustrate the full spectrum of policy approaches being pursued in the region. Moreover, this model faces significant challenges in implementation, especially in light of Argentina’s long-standing industrial base and accumulated productive capabilities, which risk being undermined rather than leveraged under the current trajectory.
Sectoral focus of productive development policies in LAC
PDPs in LAC are increasingly tailored to national contexts, reflecting diverse economic structures, political priorities and resource endowments. However, there is a clear regional trend towards fostering green industries, accelerating digital transformation and promoting advanced manufacturing. This is integral to diversifying economies, enhancing competitiveness and moving beyond traditional commodity dependence.
Countries in the region are strategically leveraging their natural resource endowments to become players in emerging green value chains, as exemplified by Brazil’s ambition to be a global green powerhouse and Chile's targeted investments in lithium value-added processes and green hydrogen. Costa Rica and Uruguay are also making significant strides in renewable energy and green growth initiatives. Digitalisation is recognised not merely as a sector in itself but as a foundational enabler for modernising and enhancing productivity across all industries, from traditional manufacturing to services. Advanced manufacturing, often linked with nearshoring opportunities, is a key driver for creating high-value jobs and strengthening domestic content in global production networks. This is particularly evident in Mexico's strategic Plan México and in the focus of Costa Rica and the Dominican Republic on high-tech manufacturing and free trade zones. Colombia has adopted a strong circular economy approach in developing its production policies, through initiatives such as the Zero Waste programme, the implementation of Eco-Industrial Parks and collaboration with international co-operation agencies – for example, the German Institute of Metrology (PTB) – to analyse the plastics value chain.
In the LAC context, the greening of production must be a central axis of any strategic prioritisation process. The region’s wealth in natural resources positions it to lead in global green value chains – but only if PDPs are designed to ensure innovation, environmental safeguards and equitable benefit sharing. Moreover, regional co‑ordination of sectoral PDPs will be critical to avoid zero-sum competition and promote synergies. As illustrated in the automotive value chains of Argentina and Brazil, well-structured co‑operation can foster regional complementarities and create economies of scale, while initiatives that are not co-ordinated risk duplication or conflict.
Implementation of instruments and mechanisms for productive development policies in LAC
Beyond general orientations, the comparative analysis presented in Table 2.3 reveals patterns in the instruments employed by countries to implement their productive development strategies.
Innovation systems
The institutional architecture for STI varies significantly among countries, reflecting differences in institutional capacity, governance and strategic alignment with productive development priorities. According to the classification presented in ECLAC (ECLAC, 2025[58]), three levels of maturity can be identified in the region’s innovation policies:
Advanced maturity. Countries with stable institutional structures, specialised agencies and relatively consistent STI strategies. Brazil and Chile, for example, have the most developed innovation policy systems of the region, with key actors and robust specialised institutions such as the Brazilian Innovation Agency (FINEP) and the Chilean Economic Development Agency (CORFO). However, they still face co-ordination challenges among multiple agencies and research institutes.
Intermediate maturity. Countries with certain institutional capacities and, in many cases, national STI strategies, but facing difficulties in inter-institutional co-ordination, sustaining efforts and fostering public-private linkages. Colombia illustrates this profile, showing important advances with iNNpulsa, its entrepreneurship and innovation agency, and initiatives such as Ruta N Medellín, yet still faces budgetary constraints. Uruguay has built a coherent architecture for digital innovation with co‑ordination by the National Agency for Investigation and Innovation (ANII) and the Ceibal Plan, although it could be scaled up. Some challenges include strengthening the alignment with production transformation processes and ensuring sustainable funding to maximise impact.
Incipient maturity. Countries lacking specific national innovation strategies or dedicated institutions responsible for innovation, as well as formal co-ordination mechanisms. These systems display prevailing weaknesses in governance, financing and capacities. This is the case for several Caribbean islands, which require sustained efforts to build and consolidate innovation policies.
The variation in innovation systems across LAC demonstrates that institutional sophistication does not automatically translate into transformative impact. While countries have developed increasingly sophisticated innovation architectures, most systems suffer from a fundamental scale-impact disconnect: they possess the institutional frameworks to support innovation but lack the critical mass of resources, co‑ordination mechanisms and strategic focus necessary to drive systemic production transformation. Effective innovation systems require not just well-designed institutions but also sufficient scale, institutional co‑ordination and alignment with broader productive development priorities and related transformative investments – a combination that even the most advanced LAC countries have struggled to achieve, limiting innovation’s role as a driver of structural economic change and competitiveness.
Human capital development
Approaches to talent formation reflect both sectoral priorities and structural challenges.
Specialised technical training. Approaches centred on technical skills for manufacturing have been adopted by Brazil, with the National Service for Industrial Training (SENAI), and by Mexico, with its dual education programmes.
Vocational training with broad coverage. Colombia has built a national professional training system with emphasis on employability with its National Training Service (SENA).
Dual education and linkages with multinationals. Costa Rica has developed successful training schemes in collaboration with international companies.
Emphasis on digital skills. Uruguay leads the region in digital education from early ages with its Ceibal Plan.
Although the region’s countries recognise skills development as fundamental to production transformation, most human capital development systems in LAC remain misaligned with the demands of modern, knowledge-intensive economies. A critical bottleneck for regional competitiveness is created by the gap between traditional vocational training focused on manufacturing skills, on the one hand, and the requirements of green and digital transformation, global value-chain integration and innovation-driven growth, on the other. Success increasingly depends on countries’ ability to anticipate future skills demands, foster private-sector engagement in curriculum design and build adaptive learning systems that can continuously evolve. Few LAC countries have fully developed these institutional capabilities, limiting their potential to leverage human capital as a driver of inclusive and sustainable productive development.
Policies for attracting and leveraging foreign direct investment
Strategies to capitalise on foreign investment vary substantially across the region. They include:
Selective regimes with local content requirements. Brazil seeks to maximise knowledge spillovers through its Investment Partnerships Programme (PPI).
Open regimes with special economic zones. Generous incentives with limited integration requirements are offered by Mexico, with its IMMEX import duty deferral programme, and the Dominican Republic, with its free zones.
Attraction focused on high-value sectors. Costa Rica has developed an outstanding capacity to attract investment in specific high-technology sectors through its Trade and Investment Promotion Agency (PROCOMER).
Comprehensive liberalisation. Argentina is advancing towards eliminating capital controls, reducing restrictions and simplifying processes for foreign investors.
The diversity of FDI strategies across LAC reflects a fundamental tension between attracting investment flows and maximising developmental impact. Countries face a strategic choice between offering generous incentives with minimal requirements (risking enclave development) and imposing selective conditions that enhance local linkages but may deter investment. Incentivising quality investments with high standards and aligned to public policy objectives can contribute to close developmental gaps. The most successful approaches, exemplified by Costa Rica's targeted high-tech strategy, demonstrate that effective FDI policies require sophisticated institutional capabilities to identify strategic sectors, assess investor quality and balance attraction with upgrading requirements. Many LAC countries have yet to develop these capabilities, leading to suboptimal outcomes where investment flows fail to generate transformative productive development impacts.
Support for small and medium-sized enterprises and entrepreneurship
Support mechanisms for small and medium-sized enterprises in LAC have differing levels of sophistication:
Comprehensive systems with specialised agencies. Brazil has developed a robust support infrastructure with broad territorial coverage via its Support Services for Micro and Small Enterprises (SEBRAE).
Linkage programmes with multinationals. Costa Rica has successfully implemented its Small and Medium Enterprise Support Programme (PROPYME) and linkage programmes with international companies.
Agencies with territorial focus. Uruguay has adopted a decentralised approach with a focus on territorial development through its National Development Agency (ANDE).
SME digitalisation initiatives. Digital transformation of small and medium-sized businesses is being prioritised by Chile, with Digitaliza tu Pyme, and Colombia, with Fábricas de Productividad.
The success of policies to support SMEs and entrepreneurship increasingly depends on the sophistication of institutional architectures that can adapt global competitiveness requirements to local contexts and capabilities. And indeed, in LAC, support mechanisms are evolving from traditional protective approaches towards integration-focused strategies that prepare SMEs for participation in global value chains. However, this transformation demands new institutional capabilities that can simultaneously deliver digital transformation, facilitate multinational linkages and maintain territorial reach. Most countries in the region have yet to resolve this complex co‑ordination challenge.
Emerging trends in productive development policies across LAC
Despite divergences in general approaches to PDPs, several common elements are emerging in the regional landscape:
Environmental sustainability as a transversal axis
The environmental dimension is gaining centrality in productive strategies:
Green hydrogen strategies. Chile leads with its National Green Hydrogen Strategy, but Argentina, Brazil, Colombia and Uruguay have also developed roadmaps in this area.
Circular economy. Costa Rica is a pioneer with its circular economy roadmap, and similar initiatives are emerging in Uruguay and Colombia.
Ecosystem services valuation. Costa Rica has been a pioneer in this area as well, incorporating environmental services valuation into its production model.
Productive decarbonisation. Decarbonisation is gaining ground, with Costa Rica at the forefront through its National Decarbonisation Plan, and with similar initiatives in Chile and Uruguay.
Sustainable tourism. Costa Rica and several countries in the Caribbean have successfully integrated sustainability into their tourism strategies, demonstrating that it is possible to combine economic growth with environmental preservation and community development. These experiences highlight the significant potential for other countries in LAC to adopt and scale up sustainable tourism as a key component of their production transformation strategies.
This trend towards environmental sustainability reflects both international market pressures and strategic opportunities linked to the region's abundant natural and renewable energy resources. More significantly, it represents a paradigm shift where environmental sustainability moves from being a regulatory constraint to becoming a driver of competitive advantage and innovation. This transformation creates unprecedented opportunities for LAC to leverage its renewable energy potential and biodiversity strategically, developing value-added environmental goods and services rather than merely extracting raw materials. However, it also presents challenges, including the need for workforce retraining as traditional industries decline, new institutional capabilities for green technology assessment and the assurance that the high costs of environmental transition do not exacerbate regional inequalities.
Digital transformation as a competitive imperative
Digitalisation is permeating productive strategies with different levels of depth:
Comprehensive digital strategies. Chile, with its Advanced Digital Agenda, and Uruguay, with its Digital Agenda, stand out for their integral approaches and high connectivity.
Industry 4.0. Mexico and Brazil have developed strategies for adopting 4.0 technologies in their manufacturing sectors, although with uneven adoption.
Digital government. Uruguay leads in this area with its advanced information technology infrastructure and digital government approach.
AI strategies. LAC countries have recently begun incorporating AI into national strategies, with a focus on responsible adoption, digital talent development and ethical governance. Brazil, Chile and Uruguay have led these efforts, with AI roadmaps integrated into their broader digital agendas (ILIA, 2024[81]).
A critical challenge identified across the region is the frequent disconnect between digital transformation strategies and PDPs. Many countries have developed sophisticated digital agendas that operate in parallel to their PDPs, missing opportunities for synergistic effects. For example, while countries may have comprehensive Industry 4.0 strategies, these often lack integration with sectoral productive development initiatives, resulting in fragmented approaches that limit their transformative potential. Successful digital transformation for productive development requires co‑ordination mechanisms between digital policy agencies and productive development institutions, ensuring that digitalisation efforts directly support strategic productive objectives, rather than operating as separate policy domains.
Knowledge-based productive diversification
Despite different approaches across the region, there is a shared trend towards diversification into higher value-added activities in knowledge-intensive sectors:
Knowledge-intensive services. Argentina and Uruguay have prioritised the development of knowledge-based services as strategic exports.
Bioeconomy. Colombia, with its Bioeconomy Strategy, is articulating a model for sustainable use of its biodiversity. Brazil;s National Bioeconomy Strategy, launched during its G20 presidency, aims to make the bioeconomy a key driver for a sustainable, inclusive, and innovative economic transformation. Similar approaches are emerging in Costa Rica.
Pharmaceutical hub. Uruguay is developing initiatives to position itself as a regional pharmaceutical hub.
Creative industries. Colombia and Costa Rica have developed strategies to boost creative and cultural industries.
This movement towards knowledge-intensive sectors reflects the search for growth sources less vulnerable to the volatility of traditional commodities, but its implications extend far beyond economic diversification. The shift represents a fundamental transformation in how LAC countries conceptualise their role in the global economy: they are moving from being peripheral suppliers of raw materials towards becoming active participants in knowledge creation and innovation networks.
Shared challenges but diverging approaches to productive development policies in LAC
The analysis of productive development strategies in LAC reveals both common challenges and diverging approaches on how to address them. Countries in the region face the shared imperative of raising productivity, reducing structural gaps and improving their positioning in global value chains. However, responses to these challenges reflect different visions regarding the role of the state, market mechanisms and international insertion strategies. Comparative analysis reveals the limitations of adhering to pure models. The most promising approaches blend elements across paradigms: state co‑ordination and good governance in strategic sectors, market mechanisms for efficiency, institutional quality for implementation and strategic international integration.
The region's productive development future likely lies not in convergence towards a single model but in more sophisticated policy mixing based on national circumstances, institutional capabilities and global positioning opportunities. What distinguishes the most promising approaches is their adaptation to specific constraints, capability-building orientation and institutional excellence for implementation effectiveness.
As LAC countries advance their productive development agendas, the key challenge is not choosing between state and market but instead building the institutional foundations for long-term transformation while maintaining the flexibility needed to adapt to rapidly changing global production contexts. The most successful strategies will likely be those that combine pragmatic approaches to immediate constraints with consistent investment in institutional and productive capabilities needed for future production transformation.
A critical dimension that deserves greater attention is the alignment between PDPs and broader National Development Plans. In several cases, the productive development agenda is only partially reflected in the overarching national strategy, hindering coherence and resource mobilisation. A systematic analysis of references to PDPs in recent National Development Plans across the region could shed light on this co‑ordination gap. Moreover, cases such as Uruguay’s Strategic Plan vs. sectoral PDPs show the potential for full alignment, while others reflect fragmentation. Strengthening this nexus would enhance policy effectiveness, accountability and long-term continuity.
This chapter has presented a renewed vision for PDPs in LAC, emphasising the urgent need for a paradigm shifts towards a modern, proactive, sustainable and inclusive approach. Given LAC's persistent reliance on commodities and the region’s significant productivity gaps, a concerted and strategic effort is needed to diversify economies, enhance technological capabilities and foster higher value-added activities across a broader range of sectors.
There is a renewed global recognition of the strategic role of governments in shaping production structures, driven by concerns about national security, climate change, geopolitical shifts and the pursuit of inclusive and sustainable growth. In LAC, a modern approach must be broad in scope (beyond manufacturing), prioritise effective governance and genuine multistakeholder collaboration, adopt a strong place-based perspective, address interconnected bottlenecks strategically, prioritise interventions in key driving sectors, embrace experimental governance and continuous learning, have a strong internationalisation focus and leverage the potential of cluster initiatives and other forms of productive articulation.
The chapter provides the foundation for targeted policy interventions based on country case studies, stakeholder consultations and empirical evidence, highlight systemic issues affecting how PDPs are designed, implemented and evaluated throughout the region (ECLAC, 2024[11]):
Implementation gap: many LAC countries have developed relatively sophisticated PDP frameworks and strategies but face significant challenges in translating them into effective implementation. This gap reflects limitations in institutional capabilities, resource constraints co‑ordination difficulties and political economic factors.
Institutional fragility: the effectiveness of PDPs in the region is undermined by institutional weaknesses, fragmentation across agencies, limited technical capabilities and insufficient monitoring and evaluation mechanisms.
Policy volatility: PDPs in LAC tend to suffer from volatility and discontinuity across political administrations, undermining their long-term prospects and the consistent efforts required for successful production transformation.
Governance deficit: many PDP initiatives in the region lack robust governance arrangements that would enable effective stakeholder co‑ordination, balanced representation, adaptive learning and strategic coherence over time.
Resource inadequacy: the fiscal and human resources dedicated to PDPs in most LAC countries are insufficient relative to the scale and complexity of their production transformation challenges, limiting the potential impact of these policies.
Co‑ordination challenge: the effectiveness of PDPs is constrained by insufficient co‑ordination across policy domains, government levels and stakeholder groups, resulting in fragmented efforts with limited synergies.
Territorial inequality: PDP capabilities and resources are unevenly distributed across territories within countries, with more developed regions better positioned to design and implement effective initiatives, potentially reinforcing existing spatial disparities.
Lack of strategic focus: many PDPs in the region suffer from insufficient prioritisation and strategic focus, spreading limited resources across too many objectives and beneficiaries rather than concentrating on key constraints and opportunities.
Marginal efforts: the productive development initiatives in many LAC countries remain marginal in scale and scope, failing to achieve the critical mass necessary to generate transformative change in production structures.
Poor articulation and co‑ordination among actors and efforts: there is insufficient articulation and co‑ordination among stakeholders and initiatives, leading to duplicated efforts and missed opportunities for collaborative advantage.
Lack of continuity between government periods: the absence of continuity between successive administrations undermines long-term initiatives and institutional learning, with new governments often discarding previous efforts regardless of their merit.
Top-down approach with limited territorial involvement: many PDPs follow a top-down approach with minimal involvement from territories, ignoring local knowledge and reducing ownership of development initiatives at the regional and local levels.
Limited evaluation: PDP initiatives are rarely subjected to rigorous evaluation, limiting learning opportunities and evidence-based policy adjustments.
Misalignment with new visions: many existing PDPs are not aligned with emerging development visions, including sustainability, inclusive growth and digital transformation.
Reduced impact: despite decades of implementation, many PDPs in the region have had limited impact in terms of productivity growth, export diversification and structural transformation.
Constraints on fiscal sustainability and implementation capacity: many PDP initiatives in LAC face challenges related to fiscal sustainability and limited implementation capacity at both the national and subnational levels. This can limit their impact and result in misalignment with local realities and societal needs. Effective PDP implementation demands multiannual investment planning and alignment with medium-term fiscal frameworks and institutional mechanisms to ensure cross-government co-ordination. Without such elements, PDPs risk remaining aspirational documents that fail to achieve transformative impact.
Crucial steps for strengthening PDPs in LAC include scaling up PDPs, strengthening multistakeholder and multilevel governance, enhancing institutional capabilities (technical, operational, political and prospective), fostering effective cluster initiatives, boosting stakeholder commitment (especially from the private sector), deepening place-based approaches and adopting a strategic line of internationalisation that includes export discipline, regional co‑ordination and international PDP partnerships.
Scale up investment in productive development policies
Increase budgetary allocations to key areas that underpin productive development, including STI, and sustainable infrastructure (addressing critical bottlenecks in connectivity, energy and transportation), high-quality skills development programmes aligned with labour market needs, and targeted support for strategically selected sectors with high growth potential and significant positive spillover effects across the economy.
Create a more attractive and predictable investment climate for private resource mobilisation, providing carefully designed and targeted incentives and fostering effective public-private partnerships. This includes reducing regulatory burdens and improving the ease of doing business while building regional and global investment partnerships, such as the one proposed by the European Union-LAC Global Gateway, to mobilise quality investment around common strategic policy goals.
Invest in the human and technical resources of government agencies, development banks and other institutions involved in the design, implementation and monitoring of PDPs. This includes attracting and retaining skilled personnel, providing ongoing training in policy analysis and evaluation, and fostering a culture of evidence-based policymaking.
Enhance the availability, quality and granularity of data related to productivity, innovation, trade, skills and sectoral performance to inform policy design, monitor progress and rigorously evaluate the impact of PDP interventions. Governments should invest in strengthening national statistical systems, developing territorial data capabilities and promoting greater data sharing and accessibility across government levels and with research institutions and private-sector partners.
Strengthen multistakeholder and multilevel governance
Create formal and informal mechanisms for regular and meaningful engagement across governments at all levels, the private sector, including firms of all sizes and industry associations, academia, labour organisations, and civil society in all stages of the PDP cycle, from the identification of priorities to design, implementation, monitoring and evaluation.
Establish clear mandates, responsibilities and accountability mechanisms for different government entities involved in PDPs at all levels. Implementing effective co‑ordination mechanisms, such as interministerial committees with clear terms of reference and joint working groups, will help to ensure policy coherence and avoid duplication of efforts.
Provide subnational governments with the necessary financial and technical resources, capacity building and autonomy to design and implement PDPs that are tailored to their specific territorial contexts, needs and competitive advantages. Simultaneously, it is crucial to establish clear frameworks for ensuring alignment and complementarity between national and subnational PDP strategies to maximise impact and avoid fragmentation.
Establish clear goals, measurable indicators and rigorous evaluation frameworks for all PDP interventions. Ensure public access to information on policy objectives, implementation plans, beneficiaries and outcomes to promote transparency and accountability.
Strengthen institutional capabilities
Strengthen technical capabilities to design effective policies that align broader macroeconomic policies, trade strategies and social and environmental objectives by incorporating strategic planning with medium- and long-term horizons, generating integrated cross-cutting approaches, managing comprehensive information systems, evaluating policy impacts, aligning mandates with institutional capacities, enhancing accountability mechanisms and fostering continuous learning cultures that enable evidence-based policymaking and adaptive management of development initiatives.
Strengthen operational capabilities to implement effective policies by assessing productivity and ensuring efficient service delivery, strengthened human resource policies, digital government interfaces for citizen interaction and quality service provision, effective interagency co‑ordination systems, meaningful private-sector engagement, transparent resource management accountability and citizen satisfaction measurement.
Strengthen political capabilities to gather the needed legitimacy, social support and coalitions for reforms by creating spaces for social dialogue among key development actors, leadership that builds trust and enhances collaboration across sectors, co‑ordination between different government levels, peer-to-peer networks at local through international levels and mechanisms for achieving shared visions among diverse stakeholders.
Strengthen prospective capabilities to anticipate and analyse global megatrends by applying participatory approaches to constructing desirable future scenarios, supporting long-term state policies that transcend administrative cycles, developing rapid response mechanisms for crises and disruptions, and cultivating dialogue cultures that anticipate potential conflicts.
Create and strengthen cluster initiatives in line with production priorities
Develop a national strategy for cluster development by identifying priority sectors and regions where cluster initiatives can have the greatest strategic impact, based on existing strengths, potential for growth and alignment with national development objectives.
Provide tailored and sustained support for cluster formation and development by offering financial and technical assistance for the establishment and operation of cluster organisations, the development of shared infrastructure and services, the facilitation of networking and collaboration among cluster members and the implementation of joint projects in areas like R&D, market development and skills upgrading. Support should be contingent on clear performance targets and effective governance within the cluster.
Foster strong leadership and effective governance within clusters by promoting clear strategic visions, strong leadership capable of mobilising stakeholders and effective mechanisms for decision making and accountability.
Promote inter-cluster collaboration and knowledge sharing by facilitating networking and learning exchanges among different cluster initiatives within the country and internationally to disseminate best practices, identify potential synergies and foster new opportunities for collaboration and market access.
Integrate cluster initiatives into broader PDP strategies by aligning and co‑ordinating with other policy interventions in areas such as STI, skills development, infrastructure investment and internationalisation.
Boost the commitment of all stakeholders, particularly from the private sector
Governments should engage throughout the policy cycle in open, inclusive and ongoing dialogue with the private sector (including large firms, SMEs, start-ups and industry associations), labour organisations and other stakeholders to build a shared understanding of national development priorities and the role of PDPs in achieving them.
Ensure that PDP interventions are well informed by the challenges and opportunities faced by firms, are easy to access and navigate, and effectively address key bottlenecks to productivity and competitiveness.
Provide well-designed and stable incentives that encourage firms to invest in innovation, technology adoption, skills upgrading, export activities and the development of higher value-added products and services. Ensure that these incentives are transparent, predictable and aligned with national development goals.
Support the creation and growth of new firms, foster a risk-taking mentality, reduce entry barriers for innovative businesses and provide access to early-stage financing, mentorship and business development services.
Recognise and support the role of industry associations and business support organisations in representing the interests of their members, disseminating information about PDPs, facilitating networking and collaboration and providing valuable services to firms.
Deepen a place-based approach to productive development policies
Invest in data collection and analysis at the subnational level to identify specific regional strengths, competitive advantages, existing industrial structures, innovation ecosystems, skills bases, infrastructure gaps and development challenges.
Provide greater autonomy, adequate financial resources and the necessary technical capacity to subnational governments to design, implement and monitor PDPs that are tailored to their specific territorial contexts and priorities. Fostering local ownership and participation in the design and implementation process is crucial for success.
Promote co‑ordination and co‑operation among different levels of government (national, regional, local) and across administrative boundaries to address shared challenges, leverage regional complementarities and support the development of interregional value chains and clusters.
Foster stronger linkages and collaboration among local firms, research institutions, universities, vocational training centres and other actors within regional innovation systems to promote knowledge sharing, technology transfer and the development of localised solutions to regional challenges.
Adress critical infrastructure gaps (transport, energy, water, sanitation) and improve digital connectivity, particularly in underserved regions, to enhance their attractiveness for investment, improve business productivity and facilitate access to markets and information.
Adopt a strategic line of internationalisation
Provide targeted support to firms, particularly SMEs, to improve their export capabilities, allowing them to access to market intelligence, to adapt products and services to international standards and consumer preferences, and to participate in international trade fairs and missions. Promoting diversification towards higher value-added exports and new markets is crucial.
Develop targeted investment promotion strategies that focus on attracting quality FDI in sectors aligned with national development priorities and that have the potential for technology transfer, skills upgrading, decent job creation and integration into global value chains. Creating a stable, transparent and predictable investment climate is essential.
Help domestic firms, especially SMEs, upgrade their capabilities, meet the quality and logistical requirements of leading global value chain firms and forge stronger linkages with international buyers. This can include supplier development programmes and support for adopting international standards.
Encourage partnerships and collaboration between domestic research institutions and firms with international counterparts to access new knowledge, technologies and research networks. Facilitating the mobility of researchers and technical personnel can play a key role.
Streamline customs procedures, improve logistics infrastructure, reduce non-tariff barriers to trade and actively participate in regional and multilateral trade agreements to enhance market access and reduce the costs of international trade.
Adopt the export performance as both an indicator of productivity improvements and a conditionality mechanism for continued PDP support, ensuring that beneficiaries face the competitive pressures necessary to drive genuine productivity gains rather than becoming permanently dependent on protection or subsidies.
Establish mechanisms for co‑ordinating sectoral strategies across LAC countries to avoid zero-sum competition and promote regional value-chain development. This includes creating platforms for dialogue among national PDP agencies, identifying opportunities for regional industrial complementarity and developing joint approaches to emerging sectors such as green hydrogen, lithium processing and digital services where regional co‑ordination can enhance global competitiveness.
Seek partnerships and learning exchanges with advanced economies’ industrial policies, particularly those focused on fair green transition and digital transformation. This includes establishing formal dialogue mechanisms with initiatives such as the European Digital Compass and Green Deal’s industrial components, the U.S. CHIPS Act, and Asian advanced manufacturing strategies (Mazzucato, 2021[82]; European Commission, 2020[12]; United States Congress, 2022[15]).
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← 1. Data were collected to map and promote PAIs, not for statistical purposes, and are based on voluntary self-reporting with validation efforts limited to cases with evident inconsistencies or missing data.