Day 7

Lecture 2

Revisiting Industrial Policy in ECA and LAC: Strategic Options for Today

A lecture by Ivailo Izvorski

Chief Economist for Europe and Central Asia, World Bank Group; with William F. Maloney, Chief Economist for Latin America and the Caribbean, World Bank Group.

Two regions, one temptation

ECA converged rapidly toward EU income levels over the last 30 years, 11 formerly centrally planned economies have graduated, and the EU "convergence machine" pulled trade and investment forward. Yet as convergence advanced, population growth fell, aging accelerated, and the contribution of productivity dropped sharply. The paradox Izvorski underlined is that these economies lived through the planned era, de facto industrial policy par excellence, and still ended up productivity-constrained.

LAC arrives at the same debate from the opposite direction. It has a long, generally unsuccessful history of industrial policy, and it does not grow: Chile, which embraced the market-friendly model most wholeheartedly, is projected to grow about a percentage-and-a-half this year with little productivity growth in a decade. In both regions the renewed enthusiasm is driven from outside, announcements have surged since COVID, propelled by national-security concerns in ECA and by the sight of China and advanced economies intervening heavily in LAC.

Crucially, both insisted on the same discipline: a policy is justified only where there is a well-identified, structural market failure that reforms cannot fix. Absent it, intervention mostly protects incumbents ("the firms of yesterday") against limited bandwidth, thin fiscal space, and a real danger of capture.

It is how you make it, not what you make

Where the money goes tells the story. In ECA, more than half of interventions target agriculture and food production, with very little on high tech and almost nothing on "moonshots" (no chips, no new electric cars) and green-transition bets such as Turkey's solar panels and Poland's heat pumps sit on established, not frontier, technology. Having gone from the world's lowest-subsidy region to one of its highest, ECA now spends more without spending better, and where programs were evaluated, from Kazakhstan's special economic zones to North Macedonia's innovation aid, the productivity gains were hard to find.

Maloney reframed the whole question: LAC does worse than other regions in most of its sectors, so the puzzle is not the product but the capacity to place and execute informed bets. Development is fundamentally about people making risk-return calculations, and there is enormous heterogeneity around any good, Norway's experience with gas is not Nigeria's. History drives the point home: many countries near 40% of U.S. income in 1860, Spain, Japan, Korea, Portugal, Sweden, took off, while LAC did not, undone by a weak ability to absorb the second industrial revolution's technologies. Chile, the world's largest copper producer in 1860, nearly lost the industry by 1900 and recovered only when U.S. firms brought new technology, while Japan built Mitsubishi, Sumitomo, and Hitachi out of copper, the lesson being not to abandon a product but to master its technology.

Evidence at a glance

• Spending rose, sophistication did not. As subsidies climbed, productivity growth slowed and export sophistication in several ECA countries deteriorated over the same period.
• Concentration and weak evaluation. Turkey, Russia, and Poland account for about 70% of ECA GDP and dominate its industrial policy; where programs were assessed, Kazakhstan's special economic zones could not be judged and North Macedonia's innovation aid lifted jobs and wages but left productivity unchanged.
• The frontier-distance trap. Only firms near the technological frontier can "innovate their way out" of competition, about 50% in the UK and France, but only about 7% in Chile in response to the China shock.
• Capabilities gaps are old and deep. LAC lags on literacy and STEM graduates, holds about 0.5% of the world's top-1,000 universities, sits mid-pack on management quality, and has shallow financial markets.

Policy implications

• Demand a market-failure diagnosis. Keep the failure analysis as a disciplinary device; identify what is structurally broken before spending, and prefer tailored public inputs to market interventions.
• Build capabilities and fix the plumbing. Engineers, designers, and managers (not just financial incentives) decide whether a bet succeeds (Brazil's Petrobras tanker initiative failed for lack of them), while shallow credit and slow contract and bankruptcy resolution (about two years in much of LAC versus three months in the U.S.) keep entrepreneurs from placing big, diversified bets.
• Learn the right lesson from Korea. Its success rested on massive human-capital investment and structural reform, not industrial policy alone, so preserving market mechanisms and competition must come first.

Lecture 3

Learning from Lending

A lecture by Peter Henry

Senior Fellow, Hoover Institution and Dean Emeritus, New York University's Stern School of Business.

The dual hurdle: two tests for public capital

Henry began with a simple framework (the dual hurdle of Gardner and Henry (2023)) drawn as nested sets. Within the universe of investments a government might make sits the socially desirable subset: projects whose economic or social rate of return exceeds the government's opportunity cost of capital. Inside that sits the commercially viable subset: projects whose financial rate of return also clears a commercial cost of capital. Projects in the innermost circle satisfy both hurdles at once, good for society and attractive to private investors.

The point is allocation: if a socially valuable project can also earn a market return, private money should carry it, reserving public money for projects that deliver social returns but cannot attract private capital. To make those judgments in real time, the Hoover–World Bank Group "Learning from Lending" team is building two portals, one on financial rates of return, one on economic (social) rates of return. As Lall stressed, this is possible because nearly every World Bank investment figure is public, back to the first loan, and the economic-returns work is fully reproducible.

From archives to portals, and to Jamaica

The financial-returns portal, building on Cole et al. (2024), turns decades of IFC equity investments into the metrics private investors actually use, multiples, internal rates of return, and public-market-equivalent hurdles benchmarked against the S&P 500 and the MSCI Emerging Markets index. Because the IFC can hold investments far longer than a private fund, it flags holding periods explicitly; the data remain confidential, so the demo uses dummy figures, itself an argument for transparency. The economic-returns portal draws on about 5,000 completed World Bank projects with rates of return from project-completion documents, sliced by region, sector, income group, and time.

This is not an academic exercise. Henry chairs the Jamaica Reconstruction and Resilience Oversight Committee (JAMRROC), named by Prime Minister Andrew Holness to guide the rebuild after Hurricane Melissa with speed, foresight, and public trust. In the Jamaican data, the sectors with high financial returns (information and transportation in particular) also show high economic returns: where private investors can profitably build, public money is freed for schools and sanitation. In a setting where "profit" has long been a loaded word, the portals are as much a communication tool as an analytic one, letting leaders manage the whole portfolio so socially oriented early choices are balanced by higher-return projects later.

Evidence at a glance

• Returns clear the bar, and rise over time. About 85% of IBRD projects historically posted economic rates of return above the hurdle rate, and the median project shows only about a 3-point optimism bias (ex-ante social return about 21%, ex-post about 18%).
• Direct benefits only. World Bank economic rates of return count only directly attributable benefits, a transport project's travel-time and cost savings, not spillovers or land-price gains, so the estimates are a conservative lower bound.
• Managers move the needle. Over 60 years, IFC commitments are under about 5% of World Bank Group commitments (leaving wide scope to route the dual-hurdle test across institutions) and work by Lall and co-authors shows higher-quality managers raise economic returns, rising by roughly 12 points where supervision is strong.
• Design beats sector. Gill argued from the Bank's evidence that how a project is designed and implemented matters far more than which sector or country it is in, a well-designed project in a low-return sector can beat a poorly implemented one in a favorable sector. The framework also travels: Morocco has 286 projects in the database, 66 with economic rates of return.

From analysis to trust

• Route capital by the two hurdles, and think in portfolios. Use private money for projects that clear both social and financial tests; reserve public and concessional money for socially valuable ones that cannot attract it, balancing the mix to avoid a debt-to-GDP problem.
• Invest in the people who deliver. Faster early disbursement and strong supervision (not rushing to closure) drive returns; skilled, experienced task managers are the key interface with client governments.
• Pair technology with legitimacy. Push for transparency on returns so governments and investors can judge what is investable; JAMRROC's authority is modeled on Jamaica's Economic Policy Oversight Committee, which helped cut debt from about 150% to 60% of GDP by solving problems "around a table rather than in the streets."