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Email this citationCIAO DATE: 12/99
Institutional Transformations and Economic Development: Learning, Inter-Firm Networks and the State in Chile
Rights vs. Efficiency Paper #2
September 1998
Institute for Latin American and Iberian Studies at Columbia University
1. Introduction: Beyond Market Reforms 1
Over the past decade, policy makers in Latin America pursued dramatic changes in national economic policy regimes, reducing government regulation and liberalizing trade. Chile stood out as the model to follow because it had adopted these economic reforms a decade earlier, and its economy showed rapid growth. 2 Chile’s average GDP rates grew over 6 percent per year between 1984 and 1995. 3 The unemployment rate declined from a peak of 27 percent in 1982 to 4.4 percent by 1992. 4 Inflation rates declined as well and are now in the annual range of 10 percent. The export share of GDP, at constant prices, rose from 12 percent in 1970, to 20 percent in 1980, and reached 35 percent by 1995. 5 During the 1985-94 period, non-copper exports grew at 15.4 percent annually. 6
The conventional view about Chile attributes its successful growth and expansion of exports to the economic reforms initiated in the 1970s, under the military government of Pinochet (1973-1990). 7 That extensive reform package included policies to liberalize both trade and domestic market prices, privatize state-owned enterprises, devalue the exchange rate, and reduce inflation by eliminating the fiscal deficit. 8 These policies articulated a strategy that sought to minimize state intervention on the theory that markets could better guide economic development. The market mechanism, according to this view, replaced previous state coordination.
This paper looks beyond the package of reforms and explores how Chilean firms have overcome past production performance deficiencies, how they have improved their capacity to compete abroad or in the newly opened markets at home, and how institutions and practices evolved in the context of the changing national policy regime. It argues that the conventional view overlooks important sources of Chile’s dynamism. The cases discussed here reveal a more complex development process in which the interactions between firms, the state, and associations reconfigured institutional arrangements while the relationship between these actors changed in the course of improving performance.
The dramatic changes in the national economic policy regime and the goal to expand exports exerted new and increased competitive pressures on Chilean firms. The central challenge became how to meet international production standards to capture market shares at home and abroad. Meeting this challenge, I argue, involved more than the neoclassical prescription of unregulated markets and a neoliberal state. The evidence from the cases discerns a process in which developing competitive and successful performance resulted in great part from the interaction of three elements. First, active state involvement in the search for new ways of organizing production, encouraging new standards of product quality and processes to upgrade the productive capabilities of Chilean firms. Second, the redefinition of relations between the state and associations. The former pressured the latter to reorganize to respond to the competitive challenges that firms faced, instead of concentrating efforts on “getting something” from the state. This, in turn, pressured the state to assist the formation of new associations that have facilitated the diffusion of knowledge among firms and promoted collective learning throughout the sector. Third, I argue that economic success has derived from a transformation in the relationships between mostly large customer firms and small suppliers in the production network. That change entailed developing new institutional arrangements and capabilities to upgrade small suppliers that enhanced the collective capacity to improve performance.
This paper discusses findings from case studies of two sectors in Chile: agroindustry and footwear. 9 The agroindustry exhibits the specific traits most associated with recent Chilean economic success: export growth in a natural-resource related sector. The outstanding growth and diversification of exports are part of the Chilean success story. In 1994, total exports (at constant prices of 1994 US$ dollar value) had more than doubled their level in 1985, and increased by 6.5 times their 1960 level. 10 The agroindustrial exports expanded significantly during the diversification process. 11 Thirty years ago this sector did not export; by 1993, exports of processed fruits and vegetables had reached US$682 million dollars, accounting for 20 percent of total processed natural resource-related exports, and 7.2 percent of total Chilean exports. 12 In addition, the processed fruit and vegetable industry has been among the most dynamic employment generators in Chile; during the 1985-1992 period, it accounted for 18.6 percent of total industrial employment. 13 Chilean agroindustrial production is characterized by networks of small producers who supply to large firms producing fruit, vegetable, wine, and dairy products for local and export markets. 14
In contrast, the footwear sector has not performed well in the post-reform period. It experienced a dramatic decline in the 1970s, a temporary growth of exports in the late 1980s, and then a later decline in the 1990s. The footwear sector exemplifies the profound repercussions economic reform had for the manufacturing sector. With liberalized trade, the rates of protection for the traditional industries dropped precipitously. 15 Competition from foreign imports combined with domestic demand contraction (due to restrictive fiscal and monetary policies, and declining employment and real wages), led to the bankruptcy of many footwear firms. The remaining firms turned to subcontracting after the economic reforms. 16
2. Challenges to the Conventional View: Learning and Institutions for Economic Development
The conventional view of Chilean economic success makes several assumptions that neither current theories nor evidence supports. First, it assumes that market prices provide sufficient conditions for developing Chilean firms’ production capacity. In other words, the reorganization of firms to meet increased competitive pressures takes care of itself once prices are undistorted and pure competitive markets prevail. 17 Second, the conventional view presumes a ready supply of exports that requires minimal technological transformation. It underestimates the problems that emerge during the process of improving production performance to be competitive. Third, it views state intervention as only stifling development, generating inefficiencies and promoting lobbying groups engaged in rent-seeking. Thus, it considers reduced state action and insulation from social forces as key to implementing the economic reforms assumed to be a sufficient basis for successful restructuring. 18 As the reforms reduce state intervention in the economy and private sector pressures on government policy, markets can function freely.
The conventional view of Chilean development coincides with the neoclassical perspective that has dominated thinking on economic development in the past two decades. This view focuses on the costs of government intervention and emphasizes the perfect market as the key mechanism for achieving development. 19 Different writers used estimates of effective rates of protection to demonstrate that government policies had produced high resource waste arising from price distortions, particularly by raising domestic prices above world prices. Import-substitution policies encouraged the development of high-cost industries divorced from comparative advantage. Moreover, the neoclassical perspective emphasizes that state intervention encourages rent-seeking and directly unproductive activities, that is, lobbyists wasting resources pursuing government favors. The focus of this perspective is on static efficiency, and on trade and price reforms to achieve efficient resource allocation.
Paradoxically, the narrow focus of the conventional view of Chile’s successful performance has blossomed in spite of a large theoretical literature that has broadened the institutional thinking of economic development. In particular, three bodies of literature constitute specific challenges to the market view and have relevance for this discussion: the theories on learning and development, the new forms of economic organization (flexible specialization, industrial districts), and the role of the state in economic development.
The starting point is that learning is a central process in economic development. Learning is the acquisition of knowledge and skills that improves the performance of production processes and the quality of products to become competitive in local or foreign markets. 20 It involves building institutions, organizations, and capabilities. From this perspective, the focus on static comparative advantage is insufficient for achieving long-term competitiveness. The initial success based on low-wages is unsustainable when other lower wage countries enter the market, or other countries with higher productivity level outcompete low wages. 21 Development, therefore, requires a process of acquiring technological capabilities and building skills to improve existing designs, processes and products (dynamic growth issues).
The key question then becomes what governance structures and institutional arrangements encourage and facilitate learning. As indicated by Sabel, institutional arrangements that reduce information asymmetries among and within firms, and between firms and the state become important to improve performance. 22 The notion of learning by monitoring, that is, linking evaluation of current performance to new standards to then build a capacity for continuous improvement, can be usefully applied to many levels of the economy (firms, associations, the state). The actors set goals and make an effort to reach defined targets through continuous evaluation and monitoring of the partners’ performances and capacities to reach those targets. This process encourages the creation of relations among and within firms, or between the state and the economy that continually foster flows of knowledge and maximizes the possibility of learning (improving production performance and fostering incremental innovation). Learning by monitoring opens the possibility that, instead of pursuing self-interest, rent-seeking, and accommodation to protectionism, the actors can redefine objectives and pursue beneficial developmental projects.
The literature on successfully performing industries and regions of advanced economies shows that the market as a coordination mechanism does not result in the best economic performance. Evidence indicates that when uncertainty is high and constant innovation is crucial to remain competitive, network forms of coordination are key to achieving successful performance. 23 In particular, the literature on flexible specialization demonstrated that regulation at the micro-level and the creation of institutions and rules that encourage innovation by balancing cooperation and competition among firms play a key role in improving economic performance. 24 From this viewpoint, learning is an interactive and socially embedded process. It depends on an institutional context that builds reciprocity and collaboration, and is not compatible with a neo-liberal regime of unregulated markets and unimpeded competition.
The literature on the the state and the economy, drawing on the experience of the successful East Asian countries, demonstrates that active cooperation among state and private groups encouraged enterprises to learn, facilitated acquisition of technology, and improved economic performance. 25 Embeddedness characterizes the relationships between the state and firms, in contrast to the state’s insulation that the conventional view assumes as necessary for achieving economic success. 26 The emphasis on networks and ties between state agencies and the surrounding social structure helps to explain successful development, but it prompts the question as to what institutional arrangements characterize those ties when they encourage learning.
The next section discusses how institutions and practices have evolved in Chile and what characterizes them when they have facilitated and encouraged learning. Several examples show problems central to improving Chilean economic performance: the ability to build local technological capacity, reorganize production, procure quality raw material, and adopt and diffuse new knowledge across production networks. The examples illustrate how resolving such problems entailed a process of constructing new institutional arrangements alternative to markets, and of reconfiguring the firms, the state and associations.
3. Building Institutions to Encourage Learning: Three Examples 27
3.1 Transforming relations in the agroindustrial production network
The first example concerns the current redefinition of relationships between large firms and their suppliers in the agroindustrial sector. Many accounts view the growth of agroindustry as the success story of the neoliberal strategy that has characterized Chile’s policies since 1974. The successful supply of exports, however, required substantially more than just changes in price signals, even when a supposed comparative advantage existed. To develop quality exports, Chilean firms had to overcome substantial technological disadvantages and considerable problems in coordinating production organized in contracting networks. Chilean firms had to discard old technical and organizational knowledge and build new skills to develop processed exports.
To illustrate, I use the case of the Chilean tomato processing industry, one of the products that achieved substantial competitiveness and constitutes an important share of processed exports. 28 Export sales of processed tomato products grew from merely two million dollars in 1981, to more than 100 million dollars in 1995, a fifty-fold increase. 29 During this period, the total volume of production increased eight times, from 14,420 metric tons per year to 113,650 metric tons of processed tomato products. 30 By 1994, Chile occupied sixth place among the world’s tomato paste producers, after the USA, Italy, Turkey, and Greece, with production comparable to Spain. Not only had Chile increased its share of the world market, but it had penetrated a very demanding one. 31 By the 1990s, the production networks had spread and grown substantially. In 1995, nine large firms worked with nearly 5,000 raw material suppliers in the South Central Valley of Chile; a decade before only two companies existed and contracted 210 suppliers. 32
The export of agroindustry products is often incorrectly seen as a primary export, masking the complexity of the process of producing products that are acceptable to foreign clients, even when the natural advantages exist. Just two decades earlier, Chile lagged far behind other producing nations. None of the indigenous firms existing at the time had the capacity to export. Their processing plants had small-scale, reconditioned second-hand equipment, and they procured their raw material by buying on the spot market the second-rate (discard) quality, and the excess supply of fresh market tomato. Thus, becoming exporters presented several technological challenges: 1) producers used local varieties and species inappropriate for industrial purposes; 2) the volumes produced at the time were insufficient to achieve a relevant presence in foreign markets; 3) the existing equipment of local plants was dated compared to that used by the established competitors (California, Italy, Portugal); and 4) the firms could not meet the quality standards required for exportation.
The state played a key role in both improving technological capacity as well as assisting firms’ reorganization in agroindustry. Post-economic reform results cannot be disconnected from state action before the Pinochet regime. Multiple authors have demonstrated that state development strategies during the 1960s and early 1970s helped to create a foundation of experiences and infrastructure resources that provided a basis for growth in the post-liberalization period. 33 This paper, however, emphasizes two dimensions of state action in the period before the neoliberal reforms.
First, in the late 1960s, the Frei administration attempted to promote an internationally competitive agroindustry by seeking the best foreign and local practices to serve as a model upon which Chile could build. The old model of relying on cheap, discard quality raw material to produce processed products could not adequately meet the requirements of foreign clients. The state engaged in development projects that facilitated the transfer of foreign know-how (plant varieties, soil preparation, cultivation, and industrial processing technologies), and that expanded agroindustrial activity to new geographical zones. 34 Second, the state experimented and helped establish a new organizational model to improve the previous system of on-the-spot market purchase of raw materials. The new model promoted relations between processing firms and suppliers in which knowledge-sharing and skill-building was a central aspect for improving production capacity to compete in foreign markets. Developing the agroindustrial sector required the widespread adoption and diffusion of foreign technology. Frei’s government had as a parallel developmental objective to modernize small producers (a goal tied to the simultaneous implementation of an agrarian reform). 35
The state pursued a model that promoted the creation of leader processing firms that would assist in the diffusion and widespread adoption of new technology. Specifically, this would be accomplished by linking networks of small producers as suppliers to the large modern processing industries, that would be either state, privately, or cooperatively owned. The large firms would develop their own internal capability to provide external suppliers with the resources that would build their skills. This model borrowed from the state’s experience in the sugar beet processing industry, and closely connected the technical personnel from the processing firms to the external suppliers. 36 The former provided help to improve small producers’ agricultural practices so that they could meet the industry’s requirements. The agroindustrial production model promoted under Frei shaped in important ways the contemporary development of the Chilean tomato processing industry.
Nevertheless, Frei’s state policies and projects could not determine nor predict this industry’s growth in the subsequent decades, after the neoliberal reforms. In the 1970s and 1980s, after the adoption of market reforms, multiple attempts to export processed tomato failed, even after private Chilean firms established contracts with outside raw material suppliers, and after substantial investments in state-of-the-art technology to install new processing plants. 37 Insuring consistent volumes of high quality product to meet the stringent international food standards required developing a production capability that did not happen automatically. The evidence from the case studies demonstrates that large processing firms met with many coordination problems in the process of production, resulting in many deficiencies in the quality of their product and performance of their process. For a decade, grave problems plagued the industry: low yields; bad quality and rotting of highly perishable raw material; irregular flow and untimely supply; lack of synchronization between the suppliers and the processing plant; and low volumes of final product.
On the supplier’s side, the high perishability of the crop combined with the inefficient reception at the industrial plant often led to reductions in the price received for the product, due to higher reject rate and higher penalties. Suppliers also often bore the burden of a coupon rationing system that the customer firms established to avoid frequent raw material overloads. A pre-approved amount of raw material could be harvested and delivered to the plant, irrespective of the actual amount of raw material a supplier had ready for delivery. Disagreements on the timing of harvest, quality and weight, and therefore on final price received, left many suppliers with a feeling of being deceived. In addition, suppliers found it difficult to achieve good yields and quality as they had never worked with this particular crop that required special cultivation practices (i.e., spacing, timing of planting, sowing, irrigation, use of fertilizers and pesticides).
Finally, the firms had to learn to adopt, adapt, and diffuse widely the new agricultural technology, specifically hybrids. 38 Reaching the potentials that this innovation offered was not easy. First, the hybrid seeds are more costly than open-pollinated seeds: the price per kilo of hybrid seeds is 80 times higher than the latter. Second, hybrid seeds are useful for only one growing cycle, given their peculiarity that only the first generation following the cross can be used, requiring that new seed be obtained each year. The small suppliers of these companies could not afford the prices of these seeds, nor could they easily access information on this new technology as it was not readily available. Third, hybrid seeds suffer frequent maladaptation to local conditions as their performance changes when removed from the original breeding ground (due to differences with soils, pests, climate, fertilization), resulting in inferior performance. Thus, simply making the new technology available to suppliers was insufficient as it was not a turnkey process.
From the above discussion, clearly merely establishing a network of suppliers did not solve the problem of irregular supply and quality. The problem was two sided: the small suppliers could not easily build their technological capabilities on their own, while the large processing firms initially lacked the capabilities to coordinate, monitor and upgrade their suppliers. The challenge to the processing firms then became how to create conditions where their suppliers could learn, in a context where other institutions (market, public or private organizations) were not providing them. As discussed below, this required that large customer firms redefine the relationships with their suppliers through a process that involved building the large firms’ own internal capabilities. The production network had to find a way to create an interactive learning and information exchange to solve the coordination problems arising in production, and thus improve the performance and the competitiveness of the agroindustry.
Solving these problems involved a process of building new skills, inter-firm practices, and upgrading the external suppliers’ capacities so that they could collectively improve production performance. Chilean agroindustry firms have been particularly successful at developing an institutional alternative. Initially, processing firms relied on a system that generated excess raw material supply, used quality control only at the post-harvest reception at the processing plant, and then applied penalties for bad produce. As firms adopted expensive hybrid technology, the continued reliance on the old system (that is, acceptance or rejection upon receipt) proved even more costly and vulnerable to failure. Moreover, demand for raw material, and thus, demand for suppliers increased as more firms entered agroindustry. 39 Firms came under pressure to keep the suppliers with whom they had established contracts. The firms defended against local competitors by reducing the likelihood of supplier defection, or their failure to meet the buyer firms’ raw material standards. Gradually, the competition among processing firms evolved away from a focus on bidding higher prices paid for raw material towards an interest in providing effective services to suppliers.
New inter-firm practices designed to ensure longer-term relations and high-quality supply developed. These practices included: price stability, introduction of quality control to monitor every step of the production process, the provision of a package of services, and the building of close ties between technical plant personnel and suppliers. 40 Contracts established in advance the prices that customer firms would pay suppliers upon delivery of raw material. As all the processing firms paid the same price, there was little incentive for suppliers to jump ship and sell to other firms. Large firms could invest in suppliers with the assurance of consistently improving future deliveries. Simultaneously, price stability reduced the financial risk for suppliers, as they knew in advance the price they would receive at the end of the production season. In addition, suppliers knew in advance the yield performance target that would bring a profit.
Firms in agroindustry created an interactive learning and information exchange using technical assistance and quality control to identify problems arising in production and monitor performance. Technical assistance went beyond the mere function of transferring know-how; it became part of an arrangement designed to reduce the likelihood of small producer failures. Technical assistance and quality control became part of a system of coordination that increased the capacity for learning by monitoring. Quality control and technical assistance allowed a constant evaluation of actual performance against a target performance, at every step of raw material production to then improve production practice. Through frequent field visits of the plant’s technical personnel (at least once a week), suppliers could receive timely response on deficiencies to correct them and still meet the buyer firms’ quality standards. Furthermore, the structure of the technical assistance built in the evaluation and comparison of the performance of the technical advisors at the buyer firms. Weekly meetings served to evaluate the field problems across various geographical zones, and created pressures on the technical advisors to work closely with suppliers to ensure the best possible production performance in their zone of responsibility.
Where did agroindustrial firms get ideas on how to improve their practices to coordinate production with suppliers? The processing firms, I argue, borrowed and built on models provided by three sources. First, from the model the government developed in the Chilean sugar industry and the new export-oriented tomato processing enterprise (discussed above). This state model emphasized supportive relationships with suppliers to achieve the successful diffusion of technology and to improve local production practices. Second, as some firms established contracts with world-class customers that had expertise in quality control techniques, they acquired new skills to better manage relations with their suppliers, particularly in the area of quality control. Third, two important channels of information were a result of the movement of managers between firms, and the information exchange between managers through their participation in the sector’s trade association (discussed in the next section). Firms that were behind in learning the skills to upgrade suppliers benefited from the experiences of others through horizontal networks between the large processing firms.
This example briefly illustrates the way in which the institutional arrangements and governance structures in the Chilean agroindustry evolved over the past two and a half decades. The relationships in the inter-firm network changed as the institutional arrangements to coordinate production were reconfigured in the context of increasing competitive pressures. Large firms came under pressure to build their capability to upgrade their small suppliers, and to develop the capacity to continuously improve production jointly with them. Initially the large firms did not have this capacity, and it did not develop automatically. Moreover, this example indicates that the emergence of new arrangements and practices of collaborative production results from the interaction among public and private actors. The process is not one of sole private initiative or of unregulated operation of the market, but one in which state intervention has a constructive role.
3.2 The reorientation of the agroindustry association
The second example concerns the reorientation of one of the most important associations in Chile today, the Federation of Agroprocessors (FEPACH). It illustrates how the state has constructed new connections with groups of private enterprises, encouraging them to seek ways to improve the production performance of firms. This process of reconfiguring relations between the state and associations began after the market reforms, under the Pinochet government, but the trend continued, and even intensified, after the transition to democratic government. In this case, the state ventures beyond macroeconomic management to both assist and encourage firms’ learning in a way similar to what Sabel calls a developmental association. 41 This is a grouping of firms that does not act as conventional interest groups but rather collaborates with the state to compete in markets. The state encourages firms to improve their products by using international standards as a reference, shaping the firms’ goals in the process.
The economic reforms adopted under Pinochet drastically affected the life of existing trade associations. Much like firms themselves, the associations had the challenge of reinventing themselves. The agroindustry firms successfully rebuilt the role of their association in a process assisted by the state. The Association of Processed Foods (Asociación de Fabricantes de Conservas or ASFACO) was born in the late 1950s. It was born during a period of protectionism and import substitution industrialization, and became the voice of canning firms through the 1960s. It represented them in negotiations with the Pacific Steel Company (Compañía de Aceros del Pacífico or CAP), a state enterprise, and the sole producer of steel and tin products in Chile. ASFACO organized all the canning firms to make joint purchases of the needed cans from CAP, resulting in lower prices for its members.
Two issues consumed the agenda of the association during this protectionism period. First, as the firms could not import tin products, they could only buy their supply from CAP with whom they faced many problems related to tin quality and prices. The next most important item on the agenda of the association’s meetings was the issue of prices for their products. For most of the 1950s and 1960s, Chilean governments had a system of price controls covering nearly every retail food item. 42 ASFACO representatives engaged in constant negotiations with the Ministry of the Economy attempting to raise the prices of their processed food products.
The new policies of the Pinochet government radically transformed the economic environment of Chilean firms, and changed the life of ASFACO. The two issues that had consumed the life of ASFACO ceased to be relevant. Market liberalization allowed for foreign imports, and thereby eliminated CAP’s tin can monopoly in the domestic market. Moreover, the government also eliminated price controls. What ASFACO could offer to its members was now obsolete in the new economic environment, and the organization entered a period of decline and inactivity.
Ironically, in stark contrast to the free market ideology of the Pinochet government, one state agency, PROCHILE, created in 1975, began to promote the idea of forming alliances between agroindustrial firms as a way to assist their explorations into foreign markets. The collapse of Chile’s economy in 1981-1982 prompted a revision of the policies of the first decade of the Pinochet government, and led to changes in the government’s relationship with the private sector. 43 The goal to increase exports in the post-1982 period led the government to form groups of firms, apart from existing trade associations, to promote the upgrading of existing production methods and products. 44 The central focus of these state-coordinated groups was to learn how to improve the product quality to meet international standards, as well as examine production practices and explore what to produce for world markets.
According to all interviewed, ASFACO began to reactivate in the early 1980s, partly as a result of the export promoting activities of PROCHILE. Through the Export Promotion Fund, PROCHILE co-financed export projects proposed by groups of firms in the same sector. Only firms in a group could receive financing, not individually; and the government financed fifty percent of the project, with private firms financing the other half. PROCHILE promoted the association of firms into sector-specific export committees that would then define a project. Projects fell into two categories: 1) improving quality to meet international standards; and/or 2) developing new products.
Once PROCHILE approved a project, it supported the export committees by providing all the specialized services that firms needed to develop their exports: acquiring information on foreign standards; organizing trips abroad to visit the factories of foreign competitors, as well as product discovery missions; and providing information on market trends. These committees provided a base from which firms, with government assistance, could discuss the building of new standards for the local firms, and discuss new product ideas acquired during visits to trade shows or visits to potential foreign clients.
PROCHILE contacted and recruited firms directly, one by one, bypassing existing organizations, such as ASFACO, to bring together firms that were both members and non-members of existing associations to form the new sector export committees. Early committees represented the following sectors: processed fruits and vegetables, salmon and other processed seafood, fresh fruit, furniture, textiles, wine, and paper products. In all, some 65 committees consisting of six to fourteen enterprises each, and integrating over 700 firms, were in place by 1988. 45
In the specific case of the agroindustrial firms, the PROCHILE committee brought them together in a way that ASFACO on its own could not. It provided an opportunity for them to develop a sense of common identity that led firms to look at the existing association ASFACO, and seek ways to recreate it in such a way that would serve to improve the competitiveness of their industry. The groups of firms began to feel that the reputation of the group, rather than just one firm, was the key to attracting foreign buyers to Chilean products. The firms identified the need for uniform quality standards as key to becoming reputable exporters. They developed new standards based on the new awareness of what clients demanded, as well as the technical information that firms had acquired on their explorations of international markets, and their contacts with foreign customers.
Whereas ASFACO used to include only producers of canned products, other types of fruit and vegetable processors began to join. In subsequent years, a new federation emerged, named FEPACH. It grouped not just the ASFACO members, but all the various agroindustrial sub-sectors, including producers of frozen, juice, and dehydrated products that had come together in the PROCHILE export committees.
The association of agroindustry firms contributed to learning among processing enterprises. It promoted new quality control practices and new contracting relations with suppliers. The association encouraged firms to subject their products to independent quality control labs for evaluation. While each processor has a quality control lab, FEPACH has promoted the use of an independent certifying company. It also provided a common route for firms to learn about international standards and production practices. Likewise, they could compare themselves with other local firms regarding processing yields and volumes, export sales, production costs, and contracting relations with suppliers. In addition, the association served as a forum for discussions on how to regulate competition for suppliers among buyer firms. The firms agreed to discourage opportunistic behavior by establishing common prices for raw material. These cooperative strategies required much sharing of information among managers of large processing firms which reinforced knowledge acquisition.
FEPACH now coordinates and establishes contracts as a group with ocean shipping lines, in the process reducing the confidentiality of much of the firm-level proprietary information. This coordination entails sharing information among firms such as destination, customer identities, products and volumes exported. In time, the association began to produce yearly reports containing data such as member ranking by production and export sales, types of products, and destination.
Encouraged by the state, the agroindustry firms became connected around a new agenda that focused on promoting higher standards, initiation of certification programs, development of independent quality control labs, and the creation of joint technical missions abroad. Once reinvented, the association was able to provide its member firms with horizontal channels of information. Enterprises increased their opportunities to learn what needed to change and how they might improve their practices. The association made large processing firms less dependent on export traders or foreign customers as their sole source of information on foreign markets and technology.
The pressures on the associations to respond to the challenges of the new economic context and the state’s effort to build new relations with private firms created a developmental association that is very different from the governance advocated by neoliberal ideology. Rather than severing the state’s relation to the economy, what we see is a process of joint public and private restructuring in which associations acquire a new role as key institutions for assisting the upgrading of firms’ capabilities. The state, however, plays a key role in orchestrating the formation of new networks among firms focused on collaborating to build their competitiveness by meeting higher product standards and improving production processes. This, in turn, places new demands on the state as it attempts to transfer the programs it initially managed so that they become part of the current tasks undertaken by the new association.
3.3 Constructing institutions under the democratic regime.
In the 1990s, the transition to democratic government in Chile intensified the trend toward constructing developmental associations and building alternative production practices to improve performance. First, in an attempt to overcome the limits of past policy strategies that focused mainly on macroeconomic balances, the new governments emphasized the modernization of production with social equity. This brought attention to sectors adversely affected during the past decade, like textiles, garment, and footwear, where unemployment was rising. Second, the export success and improving balance of trade during the 1980s brought along currency exchange appreciation, and the rise in real wages diminishing the ability of Chilean firms to compete based on low wages. In this context, the new government adopted strategies to promote the competitiveness of exports based on increased productivity, better technology, and enterprise reorganization.
The experience of CORFO (Corporación de Fomento de la Producción) best represents the move towards the new policy strategy. Until 1973, CORFO engaged in programs to improve the technological capacity of Chilean firms (including state and privately owned enterprises), especially in the sectors most closely associated with Chile’s recent export boom, like agroindustry, fisheries, and forestry. The Pinochet government considerably reduced CORFO’s role. It became limited to privatizing the state-owned enterprises and providing credit to individual firms through private banks.
Under the democratic governments of Aylwin (1990-1994) and Frei Tagle (1995 to present) CORFO has assumed a new role to promote a reorganization of firms. The experience with CORFO’s programs in the 1980s revealed the limits of the traditional instruments like individual credit and technical assistance programs to firms. 46 Building on the experience of PROCHILE during the 1980s, and drawing on the experience of the European industrial districts, CORFO began the new policy that led to the creation of Proyectos de Fomento (Development Projects), or PROFOs. The current focus is to organize enterprises in groups to foster their joint access to new technology, and effect the internal reorganization of their enterprises.
The PROFO program works by creating groups of eight to fifteen firms in the same sector organized around the goal of developing their competitiveness. CORFO commits to finance up to 70 percent of the costs of the group’s operation for three years; the firms must finance the other 30 percent. The group of firms hire a group manager to help them to elaborate a joint plan and to assist them in using the support services (credit and technical assistance) that CORFO and other state agencies provide.
One example from the footwear sector illustrates the processes that the formation of these groupings can generate. 47 The footwear industry declined dramatically in the aftermath of trade liberalization. In the late 1980s, however, new export policies that relied on depreciated exchange rates led to a surge in footwear exports. By the 1990s, however, footwear firms could not sustain their competitiveness abroad nor even in a growing domestic market. When the originally advantageous conditions reversed, as the exchange rate appreciated and wages rose significantly in the 1990s, export growth was unsustainable. Contrary to the conventional assumption that the export supply response to depreciated exchange rates is lasting, the footwear case shows its fragility. 48
Footwear firms continued to rely on dated techniques and a production organization that depended on suppliers as a way to cut costs and significantly limited their capacity to upgrade them. Moreover, exporting footwear firms were highly dependent on foreign export traders as their main information source. In most cases, the trader was a weak linkage for learning, limiting the transfer of skills to copying designs, rather than transferring the new technological and organizational practices in footwear manufacturing.
One group of footwear firms organized a PROFO in 1993. Initially, their goal was to find new customers in foreign markets. In their view, seeking customers abroad would be the solution to declining sales. The firms used the government funds to finance trips abroad. For some time, the firms did not view the PROFO as a resource they could use to upgrade their productive capabilities. Gradually, as footwear firms could not establish new foreign customers, nor capture shares in a growing domestic market, producers began to turn their attention to how to improve their technological capacity to overcome the deficiencies that plagued the industry. With additional government assistance, the associations not only began to reorganize, but the footwear firms began a new collective institution that for the first time joined both small and large ones: the Technical Footwear Institute. This institution centers its attention on assisting the internal reorganization of firms by learning about new plant layouts, design technology, and quality control practices.
While these new programs address important problems, it is premature to say they will be successful. Nevertheless, the insufficiency of simply devaluing exchange rates and liberalizing trade becomes evident from the export experience of Chilean footwear firms. These new programs provide opportunities for both firms and state agencies to engage in discussion and reflection about how to construct institutions and develop practices that facilitate continuous improvement in production.
Conclusions: Back to the Literature
In recent years, research on inter-firm networks in developing countries grew significantly. One of the research areas that expanded most is on clusters in developing countries. 49 This body of work on clusters focused on how similar these are to original descriptions of the Italian industrial districts. 50 In particular, researchers attempted to identify situations that were similar to the ideal-types presented previously in the literature that showed a geographical concentration of predominantly small firms in the same sector. That focus on finding situations that fit the descriptions of the ideal types de-emphasized the more important issue embedded in the original literature: the institutional configuration and how it affects the capacity of firms to adjust and learn.
The cases discussed in this paper illustrate that there is considerable heterogeneity among inter-firm networks given the variety of institutional arrangements. The mere presence of an inter-firm network is insufficient to foster learning. 51 It depends on developing institutions and practices to coordinate the production network that promote the upgrading of suppliers, and build the collective capabilities to improve performance. The extent of opportunities for learning and building the capabilities of suppliers depends on whether the core firm invests and devotes resources to diffuse knowledge throughout the production network. It is not a given that large firms automatically have the capacity to upgrade their suppliers in the contracting network, as both the Chilean experience and research in other developing countries demonstrates. 52 Developing that capacity depends on the degree to which the large firm is itself connected to external resources and channels of knowledge to learn about new practices and improved ways of organizing production. The latter depends on active public-private cooperation guided by mechanism for monitoring and building pressures designed to produce improvement (learning).
The literature on industrial districts, clusters and networks also emphasizes the role of associations among the key institutions for promoting successful industrial development. The literature, however, assumes associations as automatically capable. However, there is a long experience with associations in developing countries with mixed results. The cases discussed here illustrate that organizations that might help improve firms’ capacities often are unable or constrained in doing so. Associations often have little experience in providing the assistance that firms need to adjust to the new market environment. Even when they have been historically successful, they have difficulty adapting to a new policy regime. We have to look beyond the association’s presence. The existence of an association, even a forceful one, is not sufficient to help firms’ learning. The footwear sector, for example, did not lack for trade associations. The agroindustry association, however, has been far more effective at supporting improvements in the performance of firms than the footwear ones.
There are old and new associations at work in Chile. The old associations grew accustomed to being representatives of firms in negotiations with the state. They had assured membership under a legal framework that made it obligatory to be part of an association. The new ones have reoriented their focus towards seeking ways to build the capabilities of firms by reexamining production practices. They have turned to sources that can help firms in adopting new production organization, quality control methods, process and product standards. Whatever shape these new associations take, constructing them is a process characterized by the close interaction among public and private actors.
The theoretical literature on the relations between the state and the economy emphasizes that improving economic performance depends on the combined action of the state with private groups. The principles guiding the construction of the public-private ties, however, are important in determining the capacity to successfully adjust and learn. The institutions emerging in Chile that contribute to improved performance are guided by the goal to achieve better standards, the search for better production practices, and a joint public and private deliberation on how to improve performance. This goal creates pressures on all economic actors to cooperate in order to move away from achieving competitiveness based on low wages, and towards competitiveness based on enhancing productive capabilities.
(c)Copyright by the author 1998
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Endnotes
Note 1: This paper draws on my doctoral dissertation research. I would like to acknowledge the financial support from the Inter-American Foundation and the MacArthur Foundation, and the institutional support from the Economic Commission for Latin America and the Caribbean (UNECLAC) in Santiago during the period I conducted field research in Chile. I benefitted greatly from discussions with my committee members, Alice Amsden, Michael Piore, and Charles Sabel during the dissertation project. Paper presented to the Inaugural Meeting of the International Working Group on Subnational Economic Governance in Southern Europe and Latin America at Columbia University, New York, September 12-14, 1997. Back.
Note 2: For a recent example of the emergence of a new economic policy consensus in Latin America based on Chile’s experience, see Edwards (1995). Back.
Note 3: Corbo and Fischer (1994). Back.
Note 4: Martínez and Díaz (1996). Back.
Note 5: Meller and Saez (1995). Back.
Note 6: Ibid., p.13. There was an important diversification of exports; copper’s share of total exports declined from nearly 75 percent in 1970 to 39 percent in 1995. The share of copper exports declined even as the volume and value of copper exports more than doubled during the same period (Meller 1995, p.23). Back.
Note 7: See, for example, Corbo and Fischer (1994), Dornbusch and Edwards (1994), Edwards (1994), Edwards (1995), and Edwards (1996), Fontaine (1989), Hachette (1992 and 1993), Mujica (1992), Wisecarver (1992). Back.
Note 8: A generalized liberalization of imports removed all quotas and reduced tariffs to a uniform 10 percent by 1979, a drastic change since in 1973 tariffs averaged 105 percent (Dornbusch and Edwards 1994). The new administration also dismantled price controls, eliminated the previous multiple exchange rates, and privatized some 300 firms between 1974-78. The first phase of restructuring (1974-1983) had mixed results, and included a severe recession in 1982. In 1983, the Pinochet government initiated a second reform phase. It continued to emphasize trade liberalization, though the government allowed a temporary rise in tariffs between 1983 and 1986. In addition, the government abandoned a fixed exchange rate policy, depreciating the exchange rate by almost 30 percent between 1982 and 1986. For evaluations of the reforms see, for example, Arellano et al. (1987), Corbo (1985), Edwards and Cox (1987), Foxley (1983), Ramos (1986), Stallings and Brock (1993). Back.
Note 9: This study is based on fieldwork conducted in Chile during a year-and-half period from November 1994 to May 1996. For a more detailed elaboration of the methodology and sources of data see Learning and Economic Development in Chile: The State and Transformations in Inter-Firm Relations, Ph.D. Dissertation, Department of Urban Studies and Planning, Massachusetts Institute of Technology, June 1997. Back.
Note 10: There was more than a threefold difference between the 1960s, when exports grew at an average annual growth rate of 3.2 percent (less than the GDP rate), and the 1985-94 period, when exports increased at an average annual rate of 10.3 percent, while the GDP grew at an annual rate of 6.2 percent (Meller 1995, p.13 and p.35). Back.
Note 11: When I refer to agroindustry, I focus on processed fruits and vegetables products: canned, preserves, juices, frozen, dehydrated, paste and pulp. Thus, I exclude the dairy and meat products which have also grown significantly. My emphasis on processed fruits and products differs from other studies on Chile that focus on fresh fruit production. See, for example, Casaburi (1995), Escobar (1991), Goldfrank (1990) . Back.
Note 12: In 1993, processed natural resource related products (including forestry, fishing, agroindustry, dairy and meat) accounted as a group for 35.6 percent of total Chilean exports (Meller and Saez 1995, p. 37, Table 1.A.4). Back.
Note 13: Riffo, Mattos and Silva (1995, p. 24). Back.
Note 14: On the growth of networks of small suppliers and large agroprocessing firms, see, for example, Abramo, Montero and Reinecke (1996), Castillo, Dini and Maggi (1994), CEPAL (1995), and Pérez-Alemán (1997, especially chapters two and three). Back.
Note 15: Between 1974 and 1979, for example, total imports grew by 34 percent (measured in constant dollars); while imports of non-food consumer goods grew by 123 percent (Velasco, 1994 #46, p.401). For analyses of the impact of liberalization on the manufacturing sector see French-Davis, 1980 #75, Foxley, 1980 #74, Gatica Barros, 1989 #110, Mizala, 1992 #101, and Vergara, 1980 #76. Back.
Note 16: For more on the growth of subcontracting in the footwear sector see Agacino, de Laire and Echeverria (1993); Pérez-Alemán (1997). Back.
Note 17: The argument for getting exchange rates right is predicated on an automatic supply response to price changes. See Rodrik (1995) for a discussion of this assumption in the analyses of consequences of current policy reforms. Back.
Note 18: A prevalent view in the literature is that the Pinochet government insulated itself from social forces, and without political pressures, was able to implement the economic reforms. Silva (1993) challenges the thesis of insulation from social forces. Silva’s study demonstrates that multiple political coalitions formed between the Pinochet government and various economic groups, influencing the state’s capacity to pursue the market reforms. His study, however, only addresses the relations between the state and business groups in pursuing the implementation of structural adjustment policies. Back.
Note 19: Influential examples of this literature include Balassa (1988), Bhagwati (1982 and 1984), Krueger (1974), Krueger (1990), Srinivasan (1985). Back.
Note 20: Amsden (1989 and 1996), Sabel (1994). Back.
Note 21: Amsden and Hikino (1991), Amsden (1996). Back.
Note 22: Sabel (1994, 1996, and 1997). Back.
Note 23: See, for example, the works of Brusco (1982), Friedman (1988), Locke (1992), Piore and Sabel (1984), Piore (1992), Pyke and Sengenberger (1990 and 1992), Sabel (1989, 1992, 1996), Saxenian (1996). Back.
Note 24: Piore and Sabel (1984), Sabel and Zeitlin (1985), Sabel (1989 and 1992). Back.
Note 25: Amsden (1989, 1992), Doner (1992), Evans (1992, 1995 and 1996), Haggard (1990), Sabel (1994), Campos and Root (1996), Wade (1990). Back.
Note 26: Evans (1995 and 1996) defines embeddedness as the ties that connect citizens and public officers through networks that trespass the public-private divide. The concept is related to Granovetter’s work on the embeddedness of market relations (Granovetter 1985). Back.
Note 27: Unless otherwise stated, the source for evidence discussed here comes from primary data I collected through personal interviews and is presented in Pérez-Alemán (June 1997). Back.
Note 28: The tomato industry is also representative of the typical problems and constraints faced by other natural-resource related processed products like fruits, wines, and fishing, in which Chile achieved substantial competitiveness and constitute an important share of non-copper exports. For discussion of the technological and quality constraints of other products in which Chile has become competitive internationally, see, for example, Achurra (1995), Bordeu (1995), Huss (1991). Back.
Note 31: For example, in 1980, Chile exported very little tomato paste to Japan, accounting only for a .65 percent share of their total paste imports. By 1985, Chile’s share had increased to 4.46 percent, by 1990 it rose to 12.52 percent, and by 1992, it had reached 16.86 percent. By comparison, China’s share in Japan’s total tomato paste imports only increased from 6.63% in 1980, to 9.05 in 1990, and decreased to 8.07 in 1992. By 1992, Chile accounted for a larger share of Japan’s tomato paste imports than Taiwan which until 1990, had been the major exporter to Japan (CORFO 1995). Back.
Note 32: Most suppliers are full-time farmers, cultivating around ten to twelve hectares. They do not specialize in just one crop, rather a typical supplier might have three or four hectares of industrial tomato, combined with another crop to supply a different contract, either for home consumption, or for direct sale in the market. For a more detailed elaboration see Pérez-Alemán (1997). Back.
Note 33: See, for example, Castillo, Dini and Maggi (1994), Gómez and Echeñique (1991), Jarvis (1992), Meller (1995). Back.
Note 34: For more on this see Pérez-Alemán (1997, chapter two). Back.
Note 35: The ideas of income redistribution and improving small producers were prevalent under the Christian Democratic government of Frei. See, for example, Foxley (1983). The priority given to smallholders in the agroindustrial push, was parallel to another of Frei’s major programs, the agrarian reform that began directly on the largest, best irrigated and most economically important properties of Chile’s Central Valley. For analyses of the agrarian reform see Brown (1989), Jarvis (1989), Kaufman (1972). Back.
Note 36: For more elaboration on the sugar beet processing industry, see Pérez-Alemán (1997, chapter two). Back.
Note 37: High technology and investment have come to characterize agroindustrial production in Chile. For example, the installation of a modern processing plant in the mid-1980s required a US$20 million dollar investment. Back.
Note 38: Until the early 1980s, only open-pollinated seeds had been used. Hybrids offered the advantage of improving plant resistance to weather (chills, rain) and pests, improved yield/processing characteristics of plants (i.e. increased solid content), increased variety of processed products. Back.
Note 39: In addition to more tomato processing plants, there are also agroindustrial plants in other products, so producers do not face only one crop market, or one of few firms per crop, but many firms in the industry with demands for many different crops. Back.
Note 40: For a more extensive discussion on how inter-firm practices and institutional arrangements evolved over the past decade see Pérez-Alemán (1997), especially chapter three. Back.
Note 42: For an elaboration of the government’s role in price control regulations see Bennet (1968). Back.
Note 43: For more on the reformulation of the Pinochet government’s economic policies, see Meller (1995), Stallings and Brock (1993), Silva (1993). Back.
Note 44: In addition to this program, in the post-1982 period, the government also implemented export promotion measures that included subsidies to exporters, such as simplified value added tax and import tariff reimbursement; and special tax credits to certain sectors. For a discussion of these policies see Meller (1995). In addition, the government established tariffs and price bands on agricultural products that had been affected by a flood of imports [Hojman, 1993 #160]. Back.
Note 45: See Pietrobelli (1993). Back.
Note 46: See SERCOTEC (1992) for description of the various instruments to support individual firms. Back.
Note 47: For a more detailed discussion of this case see Pérez-Alemán (1997), especially chapter five. Back.
Note 48: Advocates of price reforms claim that the initial export supply response to exchange rate is self-perpetuating and lasting even when the conditions are reversed (i.e. currency appreciation and higher wages). See Rodrik (1995) for a discussion of this issue. Back.
Note 49: See, for example, Nadvi and Schmitz (1994), Rabellotti (1995), Spath (1993), Schmitz (1990, 1993 and 1995) , Schmitz and Musyck 1993. Back.
Note 50: While the original work on flexible specialization discussed two types of institutional frameworks (the industrial districts, geographically concentrated networks of firms, and the large, decentralized companies with collaborative relationships with their suppliers or subcontractors), the research on clusters in developing countries only focused on the district type. Back.
Note 51: On the abuse of the network concept see Piore (1992). Back.
Note 52: For example, the research of Dussel, Durán and Piore (1996) in Mexico shows that the capacity to upgrade suppliers was not common among Mexican garment firms. Back.
