The Noise and Rhythm of the Markets

Nahuatl was the language of the Aztecs, spoken in Central Mexico since at least the 7th century and still spoken today by almost two million people in Mexico and Central America.  In nahuatl mitote is a word from mitotiqui (dancer) and itotia (to dance). However, nowadays in Mexico the word also has the connotation of “chaotic” or “noisy” and can be explained as the noisy sound of a market place, where thousands of people are talking at the same time and nobody is really listening. Why should small firms in Latin America be concerned about Mitote?

In a market economy, firms are always interacting in a variety of transactions with other firms and organizations. They buy and sell goods and services and in the course of doing business, they forge linkages that may yield important benefits to themselves, other firms, the economy and even society at large. However, these interactions often need coordination to have a positive impact overall. If coordination fails, we can have a true mitote where the performance of all firms is affected due to information asymmetries, negative externalities and spillovers.

In other words, coordination failures can set off a mitote, and be the justification for programs that aim at strengthening and improving coordination and linkages among firms. Indeed coordination failures may occur in all areas of intervention of industrial policies. However, they are especially severe in cases of geographical agglomeration of firms. Thus the positive effects of agglomeration externalities, e.g. stronger social networks, efficient local labor markets, better knowledge diffusion and innovation, may be offset by these coordination failures. This is the paradox of agglomeration and “clusters” of firms: although they often offer remarkable opportunities, they also suffer from the drawbacks of poor coordination.

Solving coordination failures is one of the key objectives of cluster development programs (CDP). Latin America has been experimenting with them since the 1990s. Although CDPs started in Europe, they rapidly spread in Latin America in the 2000s typically focusing on areas where firms in specialized productive activities cluster. Some of the earlier CDPs in Latin America aimed at reducing the transaction costs of inter-firm collaboration, generally promoting networks of small and medium-sized enterprises (SMEs) in the same sector to cooperate and achieve specific goals: increase economies of scale in buying/selling, access difficult markets with high entry costs, engage in joint innovation processes and generate strategies for the industry as a group, among others. Later CDPs also involved collaborations beyond firms and engaging research and technology organizations, and an explicit consideration of the needs of local economic development. The activities supported usually involve various stages: mapping and selecting clusters; identifying challenges and needs for policy interventions in each cluster with the participation of private and public actors; implementing specific policy actions; monitoring results and evaluation to improve the design and implementation of the program.

These interventions create formal and informal institutional frameworks to facilitate collaboration among private firms, as well as between firms and the Government sector, and within Government. To induce more collective action among private firms CDPs often strengthen a local business association or help creating a new “cluster association” that firms may join.

These institutional arrangements have also proved useful to deal with traditional problems like free-riding, sometimes by enforcing a formal membership in the cluster association, with an annual fee that provides access to certain services for free or at a reduced price. Despite the difficulties and the variety of experiences, examples of successful coordination do exist: Chile’s Atacama Regional Development Agency, The Tourism Cluster in Colonia, Uruguay and the Red Tile Cluster in Tambaú, Brazil.

Recent evaluations of the effects of CDPs in Minas Gerais and Sao Paulo (Brazil) have shown the positive direct and significant effects on employment (+20%) and exports (between +50 and +80%) of the cluster firms directly participating in the programs, as well as of those firms localized in the area of influence of clusters and thereby indirectly affected.

As Latin America keeps improving its methods to promote competitiveness and innovation there will be more positive examples of how mitote is transformed into the rhythm and harmony of sustainable development.

Lessons Learned from CDPs in Latin America CDPs tend to have longer maturation periods than policymakers think, as they depend on emerging trust among actors, which takes time to build. Given the heterogeneity of their target population, CDPs work better when they are flexible and adapt to local needs. As CDPs tend to be implemented increasingly at the subnational level, central level governments need to guarantee consistency and regulation in order to avoid a “race to the bottom,” with regions stealing resources from surrounding areas. According to many new evaluations (Maffioli, Pietrobelli and Stucchi, 2015 forthcoming) many CDPs managed to create the conditions at the local level for increased private-private, public-private, and public-public collaboration that could not have happened spontaneously. Participatory strategic planning at the cluster level was a very useful tool to identify missing public inputs and create consensus. Capture of the benefits from few private actors and distorted behavior to seek private rents seem to be lower than expected due to the “checks and balances” introduced by the participation of several actors at multiple levels. Rigorous impact evaluations can foster the necessary and continuous processes of experimentation and policy learning.

More information:

Rethinking Productive Development: Sound Policies and Institutions for Economic Transformation
Evaluating the Impact of Cluster Development Programs
“The Impact Evaluation of Cluster Development Programs: Methods and Practices” (Maffioli, Pietrobelli and Stucchi, 2015).

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