Innovation Strategies Matter: Latin America's Middle-Income Trap Meets China and Globalisation

Productive transformation from commodity production to higher value added activities is at the heart of the transition from a middle-income to a high income economy. The key is the development of domestic innovation capabilities to move up the value chain on a broad enough basis to generate sustained productivity growth. Since WW II few countries have achieved this transition. Under the market-led strategies of the past 30-40 years, Latin American countries have become trapped at the middle-income level. Informed by a structural-evolutionary approach, I investigate the reasons for the poor productivity performance in the region. I analyse the 'within' and 'across' sector sources of productivity growth in nine Latin American countries over the period 1950-2011, compare it with China's, and link the outcomes to public policy, both with respect to state-led and market-led strategies, and to specific policies aimed at advancing innovation. I argue that the current globalisation process, particularly the rise of China, have shifted the goal posts for middle-income countries and increased the urgency to develop domestic innovation capabilities.