Watkins Advisory – Development Economics & Climate Policy for LAC

Category: Structural Change & Transformation

Examines processes of structural change and economic transformation, with attention to production systems, employment, energy transitions, and state‑led coordination.

  • How Costa Rica Made EVs Scale

    How Costa Rica Made EVs Scale

    In 2015, Costa Rica registered fewer than 500 electric vehicles. By 2024, EVs accounted for more than 1 in 10 new registrations—powered almost entirely by renewable electricity. The country did this without oil money, without a massive industrial base, and across two major political transitions. That is the puzzle this blog tries to explain—and to translate for policymakers elsewhere in the region.

    Costa Rica shifted toward high-value manufacturing and knowledge-based services after 2015. Services accounted for most output and export earnings, and export earnings concentrated in sophisticated segments. Real GDP growth averaged about 3.5% before 2020, contracted sharply when the pandemic hit, then rebounded strongly in 2021 and remained solid through 2023–2024. The free trade zone (FTZ) platform and foreign direct investment (FDI) in life sciences and corporate services anchored export performance and modern-sector jobs.

    The core argument is simple: Costa Rica’s transformation since 2015 did not come from a single policy or sector. Three enabling systems reinforced each other—an export platform anchored in FTZ-led sophistication, a renewable electricity base that enables low-carbon electrification, and a state able to digitize high-volume services. The lesson for policymakers elsewhere in Latin America is not to copy a flagship reform, but to focus on sequencing and reinforcement: what changes when these systems are built in parallel rather than in isolation.

    The sections that follow show how the systems compounded: first, shifts in capital stocks, institutions, and economic structure; second, how variation, selection, and diffusion turned pilots into routines; and third, how laws, market rules, coordination, and adaptive management helped reforms persist across political cycles.

    What is transferable—and what is not

    Costa Rica is a structural outlier in Latin America: it is small (roughly 5 million people), has maintained an overwhelmingly renewable power mix, lacks a hydrocarbon sector, and, since 2021, has been anchored by OECD accession standards. The point is not that other countries can replicate these conditions, but that many can adapt the mechanisms that turned them into durable change. Read the case by separating transferable policy design from context-dependent enablers:

    Broadly transferable lessons (mechanisms): stabilize incentives with a clear glidepath (e.g., extend EV incentives to 2034 with phased adjustments rather than abrupt reversals); run charging rollout as a service network with spacing and reliability targets; start digital transformation with one or two high-volume services (such as digital health) before pushing interoperability across government; and coordinate an export platform (investment promotion, skills, and supplier development) so tradable upgrading can finance and legitimize longer-horizon transitions.

    Context-dependent lessons (starting conditions): a near-zero-carbon power system makes transport electrification immediately low-emissions; countries with fossil-heavy grids may need to pair EV rollout with a credible power-sector decarbonization and reliability plan. OECD accession provided an external governance anchor (a credible external commitment that raises the cost of backsliding on institutional reforms); where that is unavailable, governments can mimic the effect through domestic fiscal rules, independent regulators, performance compacts, and peer-review partnerships. Costa Rica’s small geography and concentrated corridors simplified charging rollout; larger countries may need phased corridors (freight and bus depots first, then intercity routes, then nationwide coverage) and stronger subnational execution capacity.

    Three systems, not one policy, drove the shift

    Costa Rica shifted its capital stock toward knowledge-intensive production amid persistent physical infrastructure constraints. Electricity generation remained overwhelmingly renewable after 2015, anchored in hydropower and complemented by geothermal and wind power, laying the groundwork for low-carbon electrification. Fiscal reforms strengthened buffers, with debt declining from pandemic peaks and international reserves reaching historically high levels by mid‑2025. In tradables, the economy deepened its specialization in advanced manufacturing—especially medical devices—supported by FTZ infrastructure and sustained FDI inflows that recovered after the 2020 shock and reached high levels by 2024. Transport energy use remained dominated by liquid fuels because most vehicles still relied on internal combustion engines, even as new registrations shifted. The distinction is between rapid electrification in new private vehicles and slower, operations‑constrained electrification in high‑utilization segments such as buses, taxis, and delivery fleets. Those segments often deliver larger emissions and air-quality gains per vehicle but require depot charging, route planning, financing, and maintenance capacity. The dual reality is a clean-electricity base and fast-moving EV adoption at the margin, alongside a legacy fleet and public-transport systems that still drive emissions and dependence on fuel imports.

    Costa Rica focused institutional reforms on three domains: fiscal governance, decarbonization policy, and digital government coordination. In 2018, the legislature passed a major fiscal reform that introduced a spending cap and broadened taxation through a value-added tax framework, reshaping what the state could fund and how it could finance it. Also in 2018, lawmakers enacted an EV incentives law that created tax exemptions for EVs and charging infrastructure and assigned responsibilities for charging rollout and fleet transitions. In 2019, the executive launched a long-horizon decarbonization plan that set economy-wide direction and embedded transport electrification targets within a broader net‑zero pathway. In public administration, successive digital transformation strategies culminated in a 2023–2027 framework, and the state created a national digital government agency to coordinate interoperability and service delivery across institutions. These moves turned political intent into enforceable rules, multi-year plans, and implementation mandates that could survive electoral cycles.

    Economic and social outcomes shifted unevenly: growth strengthened alongside persistent labor-market duality and regional disparities. In 2020, tourism and contact-intensive services collapsed, unemployment surged, and household vulnerability increased. After reopening, export manufacturing, corporate services, and tourism drove the recovery, with unemployment falling to low single digits by late 2025. Informality remained high—about 40% of workers in several recent years—showing that productivity gains in the modern sector did not automatically translate into broad formalization. High-skill jobs and the export platform stayed concentrated in the Greater Metropolitan Area, while regional inequality motivated new territorial policy instruments, including a regional development law designed to strengthen regional planning and financing. The period combined macro stabilization and modern-sector dynamism with distributional frictions that complicate inclusive growth and the politics of sustained reform.

    The pandemic sorted winners and losers — and Costa Rica was ready

    By 2019, Costa Rica’s public health system had implemented a single nationwide digital health record, changing how clinics recorded visits, handled referrals, and interacted with patients. In transport, an EV incentives law and early charging corridors lowered the perceived risk of owning an EV and attracted private investment in EV models, chargers, and maintenance services. After the 2022 cybersecurity crisis, agencies improvised new coordination and operating practices under pressure, accelerating changes in how the state managed digital systems. When the pandemic hit in 2020, these were not contingency measures—they were already operating routines, which made them resilience assets rather than emergency responses. In evolutionary terms, these were sources of “variation”: policy experiments and shocks that introduced new routines in public services, mobility, and administrative coordination. The takeaway is that the highest-impact pilots were not symbolic; they were designed (or forced) to touch high-volume transactions and operational bottlenecks, so learning could accumulate quickly and be institutionalized.

    Selection is the filter that decides which experiments scale and which fade. In Costa Rica, the 2018 EV incentive law tilted relative prices toward battery-electric vehicles and helped EVs outcompete conventional vehicles where exemptions and operating costs mattered most. As more global manufacturers offered EV models and prices fell, competition expanded choice and lowered entry barriers. The pandemic acted as an economy-wide selection event: it punished tourism in 2020 while favoring export manufacturing and digitally enabled services that could keep operating. Fiscal rules and IMF-supported stabilization limited room for recurrent spending expansions, pushing the state toward reforms that improved compliance and efficiency rather than simply adding programs. OECD accession reinforced institutional upgrades by tying governance standards and peer expectations to membership. These filters favored tradable upgrading, digital service modernization, and electrified mobility—while making infrastructure delivery, skills supply, and implementation capacity the binding constraints.

    Diffusion is where Costa Rica’s story is most useful for implementation-minded readers: it shows how a pilot becomes “the way the system works.” In digital health, a single record and workflow moved from partial rollout to near-universal use by 2019. Clinics and hospitals stopped treating digitization as an add-on and treated the digital record as the default system of record for visits, prescriptions, and referrals. That shift required a multi-year bet: standardized processes and an implementation owner able to roll the system out site by site until coverage became routine. In electric mobility, diffusion looked like an ecosystem: as registrations rose, charging points expanded, dealerships broadened model lines, and early user experience reduced perceived risk for the next cohort of buyers. Diffusion sticks when rules are stable enough for private actors to invest, the service platform is visible to users (a record they must use, a charger they can find), and an accountable owner sustains execution through the unglamorous years of rollout. But diffusion at this scale doesn’t happen by accident — it requires a state that has converted political intent into durable rules and institutions, which is the subject of the next section.

    Rules outlast governments: how policy survived three elections

    Costa Rica made the transition durable by embedding long-horizon objectives in rules, standards, and market architecture rather than relying on ad hoc programs. The 2019 decarbonization plan defined a pathway to net‑zero by 2050 and translated it into sectoral commitments, with transport electrification as a central pillar. The EV law established a concrete incentive regime—tax exemptions and institutional obligations—that altered relative prices and clarified the responsibilities of agencies and utilities. The 2018 fiscal reform created binding constraints through a fiscal rule and tax base changes, narrowing the feasible set of public choices while strengthening credibility with lenders and investors. OECD accession in 2021 added a governance anchor, reinforcing continuity across areas such as competition policy, statistics, and institutional standards. These actions reduced uncertainty for investors and households and created a predictable environment for adoption and upgrading.

    The state backed the rules with enabling infrastructure and platforms, even as infrastructure quality remained a constraint. The national electricity utility (ICE) and the broader electricity system maintained near-universal access and a renewable generation base, giving Costa Rica a backbone for electrifying end uses without increasing power-sector emissions. After the EV law set rollout expectations, utilities and partners expanded public charging points as EV demand rose. In health, the public system financed and rolled out nationwide digital records and supporting applications through a multi-year effort. Telecommunications policy and regulator-led programs expanded broadband coverage, widening the user base for digital public services. In tradables, the state sustained the FTZ framework and export promotion institutions that helped attract and retain investment in life sciences and corporate services. Coordination across ministries, regulators, utilities, and promotion agencies aligned rules, investments, and execution—and often shaped outcomes as much as budget spending did.

    Costa Rica’s institutions learned by adjusting policies, carrying out reforms across administrations, and changing implementation practices after shocks exposed weaknesses. In 2022, policymakers revised the EV incentive regime and extended it through 2034, phasing benefits as the market matured and reducing the risk of abrupt withdrawal. After the 2022 cyber crisis, agencies changed how they govern and operate digital systems by introducing new coordination mechanisms and strengthening operational security for cross-agency response. Successive digital transformation strategies signaled a shift from isolated digitization projects to whole-of-government interoperability. In macro-fiscal management, the fiscal rule and post-pandemic consolidation kept stabilization mechanisms in place as debt ratios declined from their peaks. Institutions learned by recalibrating incentives as markets evolved, strengthening governance after failures, and retaining reforms that improved credibility and reduced fiscal risk.

    One episode illustrates crisis-driven learning: the 2022 cybersecurity attack disrupted core government digital services and forced leaders to treat cyber resilience as an operational problem rather than an IT add-on. Agencies responded by tightening incident-response routines (who declares an incident, who communicates, and how systems are isolated and restored), increasing cross-agency coordination, and strengthening continuity planning for critical services. Digital government scales safely only when the state invests in the backbone—security standards, shared monitoring, clear authority in a crisis, and practiced recovery procedures—alongside visible user-facing platforms.

    The lesson for LAC: sequence matters more than ambition

    The compounding dynamic shows up in outcomes. Growth dipped sharply in 2020 but rebounded with record growth in 2021 and remained robust through 2023–2024, reflecting resilience in tradables and recovery in services. EV adoption moved from near zero to a sizable share of new registrations by 2023–2024, supported by a stable incentive regime and expanding charging availability. Digital delivery proved feasible at scale in health services, where nationwide digital records and high usage normalized citizen interaction with state systems through digital channels. These outcomes show how an export base, clean power, and state capacity reinforce one another—while also revealing where constraints (skills, infrastructure delivery, and electricity-system resilience) become binding as adoption grows. The sequence that worked in Costa Rica—stabilize the fiscal position, anchor a renewable power base, build export sophistication, then layer in electrification and digital transformation incentives—is not a universal template, but the logic is: don’t let adoption outrun the infrastructure and institutions that make it durable. That is why the next phase is harder: as electrification and digital government move from early wins to economy-wide coverage, fiscal space, digital service capacity, and electricity-system resilience increasingly determine whether progress continues.

    The desired future state is an economy that sustains export upgrading while turning electrification and digitalization into broad productivity gains rather than enclave performance. That requires transport electrification to move beyond early adopters toward high‑utilization segments—buses, taxis, ride-hailing, municipal fleets, and logistics—while maintaining electricity reliability as hydrological variability increases pressure on the generation mix. It also requires digital government to move from flagship systems to routine, cross-agency interoperability so firms and households face lower transaction costs and better everyday service. On the labor side, narrowing skill mismatches and reducing informality would help tradable sophistication translate into broader income security and tax capacity. The practical question is not just “train more,” but “build pathways”: competency-based technical programs aligned with employer demand, paid work-based learning (apprenticeships/internships), portable certifications, and placement mechanisms that connect graduates—especially from outside the main metropolitan area—to formal jobs in export-linked firms and their suppliers.

    Policymakers can act by prioritizing measures that strengthen infrastructure-to-adoption feedback loops, reduce duality, and improve execution capacity across institutions—while adapting choices to national starting conditions (power mix, geography/scale, and available governance anchors). First, align workforce development with the export platform’s needs by moving from “training supply” to “training-to-job pathways”: co-designed curricula with employers, paid apprenticeships, short modular credentials in priority occupations, and placement support that connects trainees to formal jobs (including in supplier networks and outside the capital region). Second, protect the credibility of EV incentives while tightening delivery on charging corridor coverage and reliability so adoption does not outpace infrastructure—and treat public transport and fleets as the scale lever by pairing vehicle incentives with operator-ready enablers (depot charging, grid connections, maintenance training, and financing/procurement models that pay for uptime). In countries with fossil-heavy grids or weak reliability, pair EV scaling with a power-sector plan that improves firmness, affordability, and emissions intensity. Third, scale digital government by enforcing interoperability standards and institutional workplans, using platforms like digital health as templates for other high-volume services. Fourth, preserve macro-fiscal credibility by maintaining fiscal rule discipline while prioritizing high-return public investment to relieve infrastructure bottlenecks, strengthen electricity system resilience, and support productivity.

  • The Discipline Behind the Miracle: Learning from Taiwan and Korea

    The Discipline Behind the Miracle: Learning from Taiwan and Korea

    Many industrial policies share a common flaw: they are designed for success and unprepared for failure. Subsidies get extended, protection becomes permanent, and development banks accumulate risk without a clear plan to exit. Taiwan and South Korea’s experience between roughly 1955 and 1990 offers a structurally different model. In one generation, both converted agrarian economies into world-class exporters—showing that late-industrializing states can scale manufacturing capabilities rapidly when policy ambition is matched by institutional discipline.

    The core mechanism was not simply “more state,” but concentrated state authority over credit and trade, paired with hard performance tests. Governments steered finance, foreign exchange, and incentives toward priority sectors—and then used export results, investment targets, and periodic restructuring to cut losses and redirect capital when bets failed. Its relevance today lies in what both states got wrong as much as what they got right: rapid gains that concentrated risk, requiring painful restructuring later. Korea’s heavy and chemical industries’ rapid expansion in the 1970s produced overcapacity and non-performing loans that contributed to the 1979–80 crisis, followed by restructuring. Taiwan faced mounting pressure in the 1980s as labor-intensive exports lost competitiveness, forcing upgrading.

    The lesson for LAC is therefore less about replicating Korea’s conglomerates or Taiwan’s SME networks than about building the public-finance and planning routines that make industrial policy reversible: clear objectives, measurable milestones, and credible exit and restructuring rules. In both economies, instruments evolved over time—shifting from tighter vertical targeting toward more horizontal, capability-building policies in the 1980s—without abandoning outward orientation. Korea eased its most directive tools and restructured chaebol after 1979–80; Taiwan adopted a 10‑year economic plan in 1980 to steer upgrading toward technology‑intensive sectors. The sections that follow document what changed, what drove it, and how the state governed the process.

    What changed (1955–1990): the shape of structural transformation

    Industrialization shifted capital stocks from agriculture toward manufacturing and tradable industry. This reallocation was reinforced by outward‑oriented flows of goods, finance, and knowledge. Export earnings financed the import of machinery, thereby raising productivity and enabling further investment. Rising domestic savings deepened this accumulation loop. In Korea, commodity trade expanded from roughly US$480 million in 1962 to nearly US$128 billion by 1990, while domestic savings rose from about 3 percent of GNP in 1962 to over 35 percent by 1989. In Taiwan, exports accounted for a large share of non‑food manufacturing growth in the 1960s, and total trade increased nearly tenfold in the 1970s.

    Both states rebuilt social institutions to support export‑oriented industrialization. Planning agencies, trade regimes, and financial systems were redesigned to privilege industrial upgrading. Control over banking and foreign exchange allowed governments to steer investment toward priority sectors. Institutional designs diverged in form but not in intent. In Korea, five‑year plans, the National Investment Fund, and the Korea Development Bank channelled credit to steel, shipbuilding, machinery, petrochemicals, and electronics after 1973. In Taiwan, exchange rate reform in 1958–1960, export processing zones in the 1960s, and a 10-year economic plan adopted in 1980 structured export promotion and technology upgrading.

    Structural change reshaped social coalitions and distributional outcomes. Export‑oriented growth expanded urban employment and new middle classes while reducing agriculture’s economic role. At the same time, sectoral and regional disparities intensified. Periodic crises forced the renegotiation of coalitions. In Korea, factories in Seoul and surrounding regions accounted for nearly half of manufacturing value added and employed almost half of factory workers by the late 1970s. In Taiwan, sugar and rice declined to about 3 percent of exports by 1970, shifting rents and political influence toward industrial and small to medium-sized enterprise interests. For LAC, this political-economy channel is not incidental: reform efforts—from phasing out agro-industrial protection to restructuring energy subsidies—often fail or stall when governments underestimate how quickly rents and regional power bases shift during structural transformation.

    What drove the changes: experimentation, selection, and upgrading

    Both economies generated variation through policy and organizational experimentation. Early import‑substitution strategies were tested and then abandoned as constraints emerged. Export promotion created new competitive environments that encouraged further experimentation. The analytically powerful contrast is that Korea and Taiwan converged on the same goal—solving the coordination problems of scale, finance, and capability upgrading—through two divergent firm structures. Taiwan’s export boom was coordinated through dense networks of small and medium-sized firms (SMEs) and flexible subcontracting. At the same time, South Korea solved the same scale‑and‑coordination problem through large, vertically integrated chaebol (large, family-controlled conglomerates organized as diversified groups of affiliated firms, historically supported by close ties to state-directed finance) backed by state‑directed credit. This is not a historical curiosity; it maps directly onto a live LAC design tension: whether states should back national champions (e.g., Brazil’s BNDES-style approach; Chile’s large copper firms) or build ecosystems that help many smaller firms scale (e.g., the Dominican Republic’s export processing zones; Costa Rica’s tech‑linked upgrading). The lesson is not that one structure is universally superior, but that each requires different instruments to coordinate investment—and different forms of discipline to prevent support from becoming permanent.

    Selection operated through state‑mediated credit allocation and international markets. Access to subsidized finance depended on meeting export and investment targets. World‑market competition filtered out firms and sectors unable to meet price and quality standards. Political reassessment followed failure. In Korea, subsidized credit was rationed through state‑controlled banks and withdrawn from underperforming firms during the 1980s restructuring. In Taiwan, preferential credit, tax incentives, and access to export processing zones rewarded firms that succeeded in export markets. Once successful, export‑oriented industrialization diffused and became entrenched. Institutional routines reduced the cost of repeating outward‑oriented strategies. Learning by doing and sunk investments created path dependence. Core features were adjusted but not abandoned. Taiwan’s growth acceleration began around 1962 and lasted for more than three decades, with real GDP growth averaging roughly 8–9 percent per year through the early 1980s. Korea maintained an export-oriented approach from the early 1960s through the 1980s, despite scaling back vertical industrial policies after the 1979–80 crisis.

    How the state guided change: credit, trade, and discipline

    The state provided clear direction and engineered market rules to align private incentives with national goals. Strategic coordination was exercised through multi‑year plans and central agencies. Trade and exchange‑rate regimes were redesigned to favor exports. Regulatory architectures shaped firm behavior. Korea’s Economic Planning Board, created in 1961, coordinated five‑year plans and export targets across ministries and banks. Taiwan’s exchange rate reform in 1958–1960 and the export promotion statutes of the 1960s restructured market incentives toward outward orientation.

    Public investment provided the infrastructure and human capital needed for industrial-scale production. Both Taiwan and Korea expanded technical and vocational training—and strengthened engineering education—to match the skill needs of export manufacturing and technology upgrading. State‑controlled finance mobilized savings and absorbed risk in priority sectors. These interventions enabled large, long‑gestation projects. They also concentrated fiscal and financial exposure. In Korea, public and public‑enterprise investment accounted for roughly 40 percent of total domestic investment between 1963 and 1979, with major spending on power, ports, and transport. Korea’s domestic savings rate rose from 3.3 percent of GNP in 1962 to 35.8 percent by 1989, channelled through controlled banking systems into industry.

    Innovation systems emerged through learning‑by‑doing within export‑oriented ecosystems. Acquisition and adaptation of technology were prioritized over frontier invention. Organizational forms shaped how learning diffused. Policy feedback adjusted support mechanisms over time. In Korea, targeted support for steel, shipbuilding, and electronics enabled chaebol to become global players by the mid‑1990s. In Taiwan, public technology institutions—most notably the Industrial Technology Research Institute (ITRI)—helped absorb foreign know‑how, incubate new capabilities (especially in electronics), and diffuse process and design improvements across networks of SMEs.

    The practical implication for LAC is not a single template but a shared design principle: the organizational form matters less than the discipline built around it. Korea’s chaebol and Taiwan’s SME networks succeeded not because one structure is superior, but because each was embedded in credible performance tests—and governments were willing to act when those tests were failed. 

    Implications for LAC 

    For finance and planning ministries, the Taiwan–Korea comparison is most relevant as a lesson in state capacity to coordinate investment under hard budget constraints. Both countries solved early coordination failures by steering credit, trade incentives, and planning priorities—but they did so with clear performance tests and a willingness to restructure when bets went wrong. The LAC takeaway is that any modern industrial or productive‑development push (nearshoring, energy transition, strategic minerals, advanced services) must be designed as a fiscally legible program: explicit objectives, quantified milestones, transparent costs (including tax expenditures), and a credible plan to manage fiscal risks arising from public banks, guarantees, state-owned enterprises, and public-private partnerships.

    A second implication is to recreate “export discipline” using instruments that sit squarely within finance and planning systems. Rather than open-ended protection, support should be conditional and time-bound—linked to verifiable indicators such as export survival, productivity, formal job creation, certification/quality adoption, and integration into higher-value-added segments of value chains. Ministries of Finance can operationalize this through results-based transfers and credit lines, rules for tax incentives (ex-ante costings, publication, and periodic review), and procurement that rewards performance and innovation while preserving competition. Planning ministries can align these tools with a national investment pipeline and a small set of priority missions that are revised as capabilities change.

    Finally, the institutional lesson is to treat structural transformation as a governed portfolio of experiments. For finance and planning authorities, the priority is not picking winners once but building routines to allocate, monitor, and exit public support in a way that protects the sovereign balance sheet. That, in turn, means agreeing on a single results framework with a short list of metrics; funding independent evaluation and public reporting; writing sunset clauses and restructuring triggers into programs from the outset; and maintaining fiscal-risk oversight of development banks, SOEs, and PPPs—including stress tests and caps on guarantees. Done well, this shifts LAC policy from ad hoc deals toward credible commitment: investors get stability and coordination, while governments retain the ability to correct course when external conditions tighten.

    Taiwan and Korea show that state-led transformation is possible—but not as a permanent arrangement. Both states eventually had to let go of favored sectors, protected firms, and comfortable credit concentrations. The question for LAC is not whether governments can pick priorities, but whether they can build the institutional reflexes to revise them. That capacity doesn’t emerge from good intentions. It must be designed from the start.

  • Why Reforms Fail: Five Functions for Change in LAC

    Why Reforms Fail: Five Functions for Change in LAC

    In 2013, Mexico’s energy reform looked like a textbook transformation package: a clear legal opening, new regulators, competitive processes to attract investment, and the promise of cheaper, cleaner, more reliable power. Within a few years, the trajectory shifted. Rules were contested, permits and contracts became politicized, and investors faced rising uncertainty. The problem was not just “policy design.” Distributional conflict, institutional veto points, capacity constraints, and credibility gaps made implementation fragile and reversals politically feasible. The lesson for governments across Latin America and the Caribbean (LAC) is straightforward: even reforms that look right on paper can fail to deliver. Institutional change only holds when legitimacy, coalitions, coordination, and learning under uncertainty are managed as an integrated pathway.

    Cases like this show that the core problem is less a lack of ideas than a lack of execution discipline across interdependent steps. Institutional change must be managed as a coordinated sequence in a contested environment. When transformation is treated as a long list of separate reforms, leaders lose clarity on what comes first, what must run in parallel, and what must be sustained long enough to become routine. They also struggle to reduce uncertainty about impacts and costs. Resistance then becomes predictable—distributional conflict, bureaucratic turf wars, capability gaps, and private interests seeking exemptions or delay. The result is familiar: partial progress, missed complementarities, and ad hoc trade-offs. Credibility erodes, and the package underperforms.

    A coherent approach starts by making the pathway explicit. It turns a complex agenda into manageable blocks that you can share, sequence, and run. I propose five state functions. These five functions don’t overlap, and you can’t skip any of them: strategic vision, market shaping, public investment, coordination and capital mobilization, and adaptive learning. Read as a change pathway, they clarify what governments must put in place. Vision sets direction, market shaping creates the rules and incentives that make it possible, investment turns intent into delivery, coordination keeps everyone aligned, and learning builds in feedback and adaptation. When these functions align, they create reinforcing loops that build capability and credibility. When they do not, predictable failure modes follow—misallocation, reversals, and erosion of trust.

    Why transformation efforts stall: complexity, silos, and partial diagnostics

    Development theories illuminate important state roles. Each tends to focus on a subset of functions rather than offering a complete map for transformation. Developmental state theory emphasizes long-term vision and coordination, but it underplays institutionalized learning and adaptation. Innovation systems theory highlights networks and knowledge flows, yet it treats the state as an implicit actor and offers limited guidance on direction-setting or market creation. New institutional economics foregrounds property rights and the enforcement of rules. It often says less about how states actively shape markets or build productive capabilities. No single framework is jointly exhaustive. Policymakers who apply any of them in isolation will overlook critical functions for sustained change.

    Standard diagnostics often reinforce the problem by treating governance, regulation, finance, and investment as separate silos. They can tell you whether rules are clear, procedures are followed, and projects are well costed. They rarely ask whether the government knows where it is going. They also rarely ask whether institutions are aligned to sustain delivery, or whether the system can learn and adapt when things go wrong. Targeted political economy work can help by identifying who stands to lose (or gain), which agencies can block implementation, and which groups can mobilize against change—such as state-owned enterprises, public-sector unions, or concentrated industry lobbies. But operational evidence still struggles to accumulate into system-level learning without a unifying functional architecture.

    Disconnected reform tracks produce predictable results. They weaken sequencing and suppress learning, which lowers the returns to reform and investment. Resistance and capture risks amplify the damage. Reforms that threaten rents can trigger pushback from incumbent firms, privileged contractors, or protected state-owned enterprises; agencies also protect turf, and weak accountability increases the risk of corruption. Countries may improve governance indicators without achieving a productivity takeoff. Missing functions—especially coordination and capability-building—often explain the gap. Ambitious investment or industrial strategies can also falter. Weak regulation, accountability, or learning then produces misallocation, capture, and backlash. Learning is rarely treated as an explicit state function. Failures persist without correction, and successes are not systematically scaled. The net result is low and volatile returns. Skepticism about state-led transformation grows.

    The five functions that drive institutional change

    Governments need a simple way to describe what must be done and how the pieces fit together over time. The goal is not simplification for its own sake. It is a pathway that is complete enough to guide execution in the real world. Structural change requires five distinct state functions that cannot be collapsed into isolated policies. Progress depends on moving through them as a coherent sequence, not as independent checkboxes. The sequence also helps manage uncertainty and resistance. Credible direction builds legitimacy, enabling rules to reduce discretion and rent-seeking; early delivery builds confidence; coordination brokers compromises; and learning course-corrects when assumptions fail. The model identifies five functions: strategic vision, market shaping and regulation, investment and service delivery, coordination and capital mobilization, and adaptive governance and learning. Each corresponds to a different mode of state action—choosing direction, setting rules, allocating resources, aligning actors, and adjusting in response to feedback. Together, they describe how change is initiated, implemented, and sustained. The absence of any one function can derail transformation even when others are strong.

    Recent LAC experience shows how a missing function can derail change. In Mexico, shifts in strategic direction weakened legitimacy and raised regulatory uncertainty after the 2013 energy opening. Weak enabling rules and oversight can also turn programs into rent opportunities. Brazil’s Petrobras contracting scandal illustrates how discretion and weak controls can corrode performance and trust. Delivery gaps can be just as damaging. In Haiti, repeated difficulties translating reconstruction and service commitments into sustained results eroded confidence. Coordination failures can stall implementation even when the direction is clear. In Colombia, implementation of the peace accord has faced coordination and financing bottlenecks that have slowed delivery in territories. Finally, weak feedback and adaptation can lock in underperforming policies. Argentina’s repeated cycles of price controls and ad hoc subsidies show how reversals can substitute for learning.

    The model is designed so that each function is distinct, yet together they cover the full spectrum of state roles. That is what makes it useful as a practical change sequence. Strategic vision concerns choosing ends. Market shaping governs rules and incentives, while investment focuses on direct provision and asset creation. Coordination and accountability manage cross-government incentives, distributional conflict, and capital mobilization across institutions. Adaptive learning institutionalizes feedback and adjustment over time. The literature maps unevenly onto these functions. Most approaches emphasize some functions but not others, which is why partial diagnostics persist. For policymakers, the implication is practical. Durable change often fails when a single block is missing, even when other reforms are advanced.

    Development outcomes depend on alignment and feedback across functions, not excellence in any single domain. Momentum must also carry early actions into institutionalized routines. Strong public investment without market discipline or accountability raises fiscal risk and lowers returns, as repeated LAC debt cycles show. Strong regulation without investment and coordination can also disappoint. Productive capabilities remain underdeveloped when delivery and alignment are weak. The model treats transformation as a system. Vision focuses effort, shaping the market enables action, investment delivers tangible progress, coordination provides the glue that holds the institution together, and learning embeds adaptation, so gains persist. Uruguay’s renewable energy transition is a useful counterexample. A clear direction, stable market rules (including auction design), credible delivery of new generation, effective coordination among public entities and investors, and ongoing learning sustained rapid change over time. This logic explains why fragmented reform packages underperform despite isolated improvements.

    How the model improves diagnosis, sequencing, and credibility

    A functional lens turns diagnosis into a plan. It shows which block in the change pathway is missing and where the capability is binding. By assessing performance across the five functions, analysts can identify whether stagnation reflects weak vision, poor market shaping, thin delivery capacity, coordination failures, or missing learning mechanisms. That is more actionable than sectoral or institutional checklists. In LAC, many countries strengthened rule-of-law and regulatory indicators, yet failed to diversify or innovate. Gaps in vision and learning often explain why governance improvements did not translate into transformation.

    The model also operationalizes political economy and financial constraints. It supports realistic sequencing from enabling conditions to delivery to durability. Sequencing choices—such as whether to reform regulation before scaling investment, or to pilot before scaling—should be evaluated based on functional readiness, not ideology. Many failures are not technical. They reflect veto points, distributional conflict, and credibility problems—for example, resistance from public-sector unions, pushback from incumbent utilities or other state-owned enterprises, or pressure from export industry lobbies for exemptions and special regimes. Pilots, phased implementation, and transparent risk governance can reduce uncertainty and lower resistance. They clarify who bears costs and how risks are managed. Large-scale capital mobilization without credible oversight can create contingent liabilities and credibility loss. Repeated renegotiations and legal disputes in some LAC transport concessions show how weak risk allocation and accountability can undermine long-term credibility. By linking finance, accountability, and learning, the model helps governments manage trade-offs transparently and sustain momentum beyond the first wave.

    Learning strengthens credibility by turning reform into a self-correcting routine. It also raises long-run impact by improving policy over time. Monitoring, evaluation, and experimentation help governments detect failure, end ineffective programs, and scale what works. Mexico’s PROGRESA illustrates the point. Rigorous evaluation supported evidence-based scaling and political sustainability. The contrast is costly. Prolonged protection of underperforming industries shows what happens when learning is missing. Treating learning as integral helps institutionalize change. Performance improves through feedback rather than waiting for a crisis.

    Making change stick

    LAC’s productivity gaps persist for many reasons, but a common pattern emerges in practice: reforms often move in pieces, and those pieces do not reinforce one another. The result is predictable. Progress stalls, credibility erodes, and governments end up reiterating the same agenda under tighter constraints.

    One practical application is to design a policy-based MDB loan around the five functions, with actions sequenced to build credibility and manage resistance. A first step could set the direction (a published, costed transformation strategy with a delivery mandate) and establish clear rules (time-bound regulatory changes that reduce discretion and clarify incentives). A second tranche could tie disbursement to early delivery (a small number of visible, implementable investments or services) and to coordination (a standing cross-ministry delivery unit with agreed financing, risk governance, and stakeholder engagement). A final tranche could institutionalize learning (monitoring and evaluation, feedback loops, and pre-agreed “course-correction” triggers if targets are missed). Across different groups, indicators would track not only outputs, but credibility signals—policy stability, dispute-resolution performance, procurement integrity, and whether feedback is acted on—so the loan supports lasting change rather than one-off compliance.

    What success looks like is alignment that compounds over time: direction that stays credible, rules that enable action, delivery that builds confidence, coordination that sustains coalitions, and learning that keeps the system adaptive. Uruguay’s renewables build-out shows what this alignment can look like in practice. The payoff is cumulative capability and resilience, not episodic reform cycles.

    Policymakers can use this functional lens to break transformation into manageable blocks and to communicate a credible pathway, internally and with partners. The key is to plan reforms as a reinforcing portfolio, not as disconnected initiatives. That requires managing uncertainty and resistance throughout implementation—distributional conflict, bureaucratic inertia, veto points, and interests seeking delay or exemptions. In practice, governments should ask two discipline questions at each stage: what function is missing, and what would make the next step politically and operationally credible? For MDB-supported programs, this lens also helps shift policy loans from checklist compliance to sequenced capability-building, with disbursements and indicators that reward delivery, coordination, and learning—not just legal changes on paper. Used this way, the model supports coherent, durable transformation.

  • How Chile Built Copper and Salmon Exports 1980–2010

    How Chile Built Copper and Salmon Exports 1980–2010

    Between 1980 and 2010, Chile moved from a volatile, copper-dependent economy toward a more complex export platform—still anchored in copper but complemented by a globally significant salmon aquaculture industry. The core policy challenge was not simply “grow exports,” but to convert a highly volatile copper rent stream into stable fiscal capacity, while building new tradable sectors capable of competing in demanding markets. Chile’s experience is relevant across Latin America and the Caribbean because it highlights two design problems that recur in resource-rich settings: how to build credible macro-fiscal buffers before the boom peaks, and how to create a sector where private investors will not initially bear technology and market-entry risk.

    This post unpacks the transformation through three lenses: (1) how Chile’s “human ecosystem” changed in terms of capital stocks/flows, institutions, and social cycles, (2) what drove changes via variation–selection–diffusion mechanisms, and (3) what the state did—especially in fiscal rulemaking, market architecture, and innovation catalysis. A practical objective is to make the mechanisms visible (rules, sequencing, incentives, and state capabilities), including where the economic model that was used imposed costs, most clearly in the salmon sector’s regulatory lag and disease crisis. 

    Human ecosystem shifts: capital, institutions, and cycles

    The most visible shift in capital stocks and flows was scale. Copper production expanded from roughly 1 million metric tons (1980) to over 5.4 million (2010), reinforcing Chile’s role as a global copper leader. In parallel, salmon exports moved from near-zero in the early 1980s to a major non-traditional export. By 2007, exports reached about US$2.3 billion, and Chile became the world’s second-largest salmon producer. Macro-financial flows were also re-engineered: a stabilization fund architecture evolved from the mid-1980s copper fund into the Economic and Social Stabilization Fund (ESSF) created in 2007, enabling a countercyclical response during the global financial crisis, including a reported stimulus package of up to US$9 billion, including about US$4 billion of direct finance.

    Two institution-building pathways mattered during this time. First, in copper, Chile preserved a capable state producer (Corporación Nacional del Cobre de Chile (CODELCO)) while designing a legal and fiscal environment that could support large private investments over long horizons. Second, in salmon, the institutional breakthrough was a hybrid innovation vehicle: Fundación Chile helped transfer and adapt cage-farming technologies, absorbing early-stage uncertainty and demonstrating commercial viability before wider private entry. Over time, a supporting industrial ecosystem formed: by 2010, the salmon cluster included over 4,000 small and medium-sized enterprises (SMEs) in logistics and specialized inputs (e.g., vaccines). Social outcomes shifted as well: poverty rates fell from about 45% (1987) to 11.5% (2009), thereby expanding domestic socioeconomic resilience even as growth remained export-led.

    Chile’s political economy consolidated a “dual track”: copper rents were partly captured directly through CODELCO (accounting for a major share of total fiscal revenue), while private capital expanded production under secure rules. The fiscal system was redesigned to weaken boom–bust cycles through the Structural Fiscal Surplus Rule (2001) and the ESSF (2007), effectively decoupling domestic spending from copper price volatility. The salmon sector, however, illustrates the consequences of institutional lag in fast-growing resource-based activities: the infectious salmon anemia (ISA) virus crisis (2007–2010) caused a major rupture that forced post hoc upgrading of sanitary and environmental governance. The combined message is that Chile strengthened macroeconomic “shock absorbers” in copper earlier and more systematically than it built ecosystem and biosecurity shock absorbers in salmon.

    What drove the changes: variation, selection, and diffusion

    The 1980s are characterized as a period of experimentation. In mining, institutional variation took the form of a high-security concession model created by early-1980s changes in mining laws and the code, which introduced “constitutional concessions” that co-existed with state ownership. In aquaculture, variation combined natural endowments (southern cold waters) with imported production knowledge; Fundación Chile’s early pilots served as structured experiments that reduced uncertainty about whether salmon farming could be commercially viable at scale in Chile.

    Chile’s selection environment was not purely “market.” For copper, the Foreign Investment Statute (DL 600) is described as providing guarantees that improve predictability for investors, favoring large-scale, capital-intensive projects able to ride long commodity cycles (the Escondida mine is an emblematic case). For salmon, selection occurred through a state-supported proof-of-concept logic: public or hybrid pilots helped demonstrate profitability, after which private firms and a supplier base expanded rapidly. The same selection forces also revealed weaknesses: disease dynamics (ISA) and subsequent regulatory tightening acted as a harsh selection event, penalizing high-density growth models that had outpaced monitoring and enforcement capacity.

    In macroeconomic management, diffusion and retention were institutional: the copper fund architecture evolved into the ESSF, and the structural fiscal rule became a routine for transforming volatile rents into predictable fiscal space. In productive sectors, diffusion took the form of clustering and supply-chain deepening—especially in salmon, where know-how and specialized services spread through a dense regional ecosystem (including thousands of SMEs). A policy-relevant tension is apparent: Chile retained “good” fiscal governance routines relatively early. “Bad” routines in salmon production were maintained for perhaps too long, e.g., high-density expansion with insufficient biosecurity, increasing the probability and cost of a later crisis.

    State role: rules, finance, and learning

    The state’s central contribution was market architecture. In copper, Chile maintained a state anchor (CODELCO) while creating credible, high-security investment rules for private entry via concessions and the DL 600 framework. In macro policy, the state adopted a Structural Fiscal Surplus Rule (2001) to manage “Dutch disease” risks by saving during booms. This rules-based approach mattered because it made intertemporal trade-offs explicit and constrained short-term political spending pressures. The result was institutional continuity that survived major political transitions and supported long-duration investments typical of mining.

    Chile used copper-linked institutions to convert volatile revenues into countercyclical fiscal capacity. The sequence from earlier copper stabilization mechanisms to the ESSF (2007), which supported crisis-era spending, included the reported US$9 billion stimulus during the 2008–2009 shock. In parallel, the state supported the productive base by enabling investments in ports, energy, and related infrastructure, helping both private mining and aquaculture scale in geographically remote regions. The policy lesson is not “spend more,” but “spend with buffers”: stabilization funds and fiscal rules created room to maintain public investment when external conditions deteriorated.

    The salmon case underscores a specific state capability: acting as an early “venturer” when private investors will not fund uncertain learning. Through Fundación Chile (a public–private initiative between the Chilean state and International Telephone & Telegraph (ITT)), the state absorbed initial technical and market risks, proved a business model, and then exited by selling pilot companies to the private sector. This is a replicable design choice for LAC countries seeking new tradables: create an institution with technical autonomy and an explicit exit mechanism. The caution is equally important: innovation policy cannot stop at production know-how. The ISA crisis illustrates that regulatory science (biosecurity, environmental monitoring, and enforcement routines) must co-evolve with industrial scaling, or the state will have to rebuild the sector under crisis conditions.

    Policy takeaways for Latin America and the Caribbean

    Chile’s experience suggests that “resource-led” growth is not pre-determined by geology; it is shaped by institutional choices about rent management, market rules, and the state’s capacity to learn. 

    Three policy takeaways stand out:

    1. Build fiscal buffers as core infrastructure, not as a “nice to have.” Chile’s stabilization architecture (structural rule plus the ESSF) is a precondition for countercyclical policy in a commodity economy, not an optional add-on.

    2. Use hybrid institutions to create sectors—but design the exit and the governance. Fundación Chile’s model shows how a public–private vehicle can reduce technology and market-entry uncertainty and crowd in private investment; the institutional design (autonomy, technical capability, and an exit path) is the transferable element.

    3. Do not let production scale outrun regulatory science. Salmon’s rapid expansion delivered exports and clusters, but the ISA shock illustrates the costs of regulatory lag. Governance for biosecurity and environmental risk must be built early, alongside incentives for growth.

    For Latin America and the Caribbean policymakers, the practical implication is to treat sector strategy as a portfolio problem: protect the budget from commodity volatility, use targeted, capability-based institutions to build new tradables, and ensure that regulatory and monitoring capacity grows at the same pace as production. The opportunity is immediate for countries facing new mineral or aquaculture booms: build the fiscal and regulatory “shock absorbers” before scale makes reform politically and technically harder. 

  • Mexico’s Mobile Leapfrog (1990–2010): Lessons for Transitions

    Mexico’s Mobile Leapfrog (1990–2010): Lessons for Transitions

    Between 1990 and 2010, Mexico experienced one of the most rapid transformations in communications in the developing world. At the start of the 1990s, the country had fewer than five fixed telephone lines per 100 inhabitants, multi-year waiting lists for connections, and a geographically uneven copper network concentrated in major cities. By contrast, by 2007, Mexico had more than 60 mobile subscriptions per 100 inhabitants, rising to roughly 80 by 2010, making mobile telephony the dominant form of access nationwide. This transformation was driven not by incremental extensions of legacy infrastructure, but by moving directly to mobile networks, prepaid billing models, and large-scale private investment enabled by regulatory reform.

    For policymakers across Latin America and the Caribbean (LAC), this is not simply a telecom success story. It is a concrete, data-rich case of how infrastructure transitions unfold under conditions of scarcity, inequality, and institutional weakness—conditions that closely resemble those faced today in today’s transformation. Mexico shows how rapid access expansion can be achieved at scale, but also how early design choices around competition, regulation, and public investment can lock in market concentration and regressive cost burdens for decades. 

    Critically, Mexico’s leapfrog did not eliminate monopoly power; it transformed it. The 1990 privatization of Telmex replaced a state-owned monopoly with a privately controlled one, concentrated under Carlos Slim’s business group. While this shift accelerated investment and access, it also transferred extraordinary market power to a single actor in the absence of effective competition enforcement — a choice with distributional and welfare consequences that persisted for decades.

    After reading this blog, policymakers should be better equipped to identify which elements of Mexico’s experience enabled speed and scale, and which design failures undermined affordability, equity, and long-term innovation. The call to action is to design future transitions that combine quick rollout with a strong market structure, credible regulation, and clear ways to include everyone. 

    The analysis proceeds in three sections: how Mexico’s human ecosystem changed, what evolutionary forces drove those changes, and how the state shaped outcomes—for better and worse.

    How mobiles reshaped capital and social systems

    Mexico’s capital stocks were transformed primarily through substitution rather than accumulation. Instead of closing its fixed-line gap—Mexico remained at least six percentage points behind peers such as Chile and Argentina in landline penetration in the early 2000s—the country bypassed copper entirely. Spectrum, allocated by the state through regional licenses in the early 1990s, became the critical productive asset. By 2007, Telcel alone operated more than 48,000 points of sale and over 1,100 exclusive distributors, creating a dense commercial infrastructure that extended mobile access deep into peri-urban and rural areas where fixed lines had never been viable. Mobile telephony thus became a new form of socio-economic capital, accessible without a fixed address or formal employment.

    Capital flows also shifted in structure and velocity. The introduction of prepaid SIM cards in the mid-1990s eliminated the need for credit histories and monthly contracts, converting telecommunications revenue into millions of micro-transactions purchased at pharmacies, corner shops, and street stalls. By the mid-2000s, more than 80 percent of Mexican mobile subscriptions were prepaid, one of the highest shares in the OECD. Knowledge flows accelerated in parallel: migrants—numbering roughly 9 to 11 million Mexicans in the United States during this period—used mobile phones to coordinate remittances that exceeded USD 25 billion annually by 2007, while informal workers and small firms used SMS and voice calls to reduce transaction and coordination costs.

    Social institutions and social order adjusted more slowly than technology. Although Mexico established a telecommunications regulator (COFETEL) and liberalized the sector through the 1995 Federal Telecommunications Law, enforcement lagged behind. By 2006, Telcel controlled roughly 80 percent of the mobile market, and high interconnection fees acted as a de facto tax on competitors. Social cycles compressed dramatically—Mexico moved from analog cellular systems to nationwide GSM digital networks in little more than a decade—but distributional effects persisted. Household survey evidence shows that by 2006, low-income households were spending a growing share of their budgets on mobile services, often cutting expenditures on clothing, hygiene, and home maintenance to remain connected.

    How mobile spread: innovation, competition, and coverage

    From an evolutionary economics perspective, variation in Mexico’s telecom transition came less from domestic technological invention than from business-model innovation. Cellular technologies such as GSM were imported, but the decisive innovation was the adoption of prepaid billing for a large unbanked population. Entry-level handsets fell below USD 50 by the early 2000s due to the scale of global manufacturing, and operators experimented with low-denomination airtime cards, on-net discounts, and bundled offers. Users themselves generated variation through practices such as missed call signaling and phone sharing, which fed back into tariff design and reinforced prepaid dominance.

    Selection pressures strongly favored scale, coverage, and distribution density. Telcel benefited from Telmex’s inherited infrastructure, early access to spectrum across all nine regions, and a regulatory environment that failed to impose cost-based interconnection pricing. Competitors such as Iusacell, Movistar, and Nextel survived only in niches—urban postpaid users or specialized business services—because they could not match Telcel’s nationwide reach or absorb interconnection costs. Crucially, this was not neutral market selection: weak regulatory enforcement shaped the selection environment, systematically favoring the incumbent and selecting for concentration rather than diversity.

    Diffusion was nevertheless rapid because mobile telephony required minimal complementary infrastructure. Unlike fixed broadband, which depended on copper networks and personal computers, mobile access required only a handset and a SIM card. Mobile subscriptions rose from negligible levels in the early 1990s to roughly 12 million by 2000 and around 68 million by 2007. Econometric studies for Mexico show statistically significant positive effects of mobile and ICT diffusion on GDP over the 1990–2014 period. Yet diffusion had limits: penetration in Mexico City exceeded 90 lines per 100 inhabitants by the mid-2000s. At the same time, poorer states such as Chiapas lagged far behind, illustrating how national leapfrogging can coexist with deep regional inequality.

    How the state shaped winners, losers, and learning

    The Mexican state played a decisive but uneven role. Direction-setting was front-loaded and bold: the 1990 privatization of Telmex raised approximately USD 1.76 billion and transferred operational control to a private consortium with foreign technical partners, while mobile services were opened to limited competition through regional licenses. This dual strategy catalyzed rapid investment and modernization—by 1994, 75 percent of Telmex’s switching systems were digital—but coordination during implementation weakened. Key operating rules for local competition were delayed until 1998, effectively granting the incumbent several additional years of dominance.

    Rule-setting and enforcement proved to be the system’s weakest link. Although COFETEL was established by law, it lacked the authority to impose meaningful penalties or structural remedies. High interconnection fees persisted throughout the 2000s, and the OECD later estimated that weak competition in telecommunications cost the Mexican economy roughly USD 25 billion per year in excess prices and lost welfare. Public investment in infrastructure and public goods was limited: Mexico did not deploy a robust universal service fund or publicly financed backbone networks during the leapfrog period, relying instead on private capital guided by commercial incentives.

    Innovation and learning were similarly concentrated. Mexico captured large consumer-side welfare gains from connectivity, but it did not build a broad domestic industrial ecosystem around telecommunications. Handsets were imported, applications were largely foreign, and organizational learning accrued mainly within a single dominant firm. América Móvil’s replication of the prepaid mobile model across 18 countries created a Mexican multinational valued at over USD 100 billion by 2007. Still, this success did not translate into a competitive, innovation-rich domestic ecosystem—an outcome with clear parallels for future transitions that prioritize local value creation over simple asset deployment.

    Three lessons for designing transitions

    Mexico’s mobile leapfrog yields three core lessons. First, leapfrogging succeeds when business models match income realities. Prepaid services, micro-transactions, and low-cost handsets—not technology alone—enabled rapid expansion to populations excluded from formal credit and fixed infrastructure. Second, weak competition enforcement casts long shadows. Delayed regulation allowed market concentration to solidify, imposing high prices and limiting innovation for more than a decade. Third, access gains do not guarantee equity. Without sustained public investment and explicit inclusion mechanisms, regional and income disparities persisted even as national indicators improved.

    The core message for LAC policymakers is that speed and scale must be balanced with institutional strength. In renewable energy and power systems, as in telecommunications, transitions that rely exclusively on private incentives risk reproducing monopoly power, regressive cost burdens, and uneven spatial outcomes. The call to action is to build in competition policy, universal service mechanisms, and learning ecosystems into transition design from the start. Mexico’s experience demonstrates both what is possible when societies leapfrog—and what must be deliberately designed to avoid repeating its costly mistakes.

  • Mexico 1994–2007: Growth Without Diffusion—Policy for Transitions

    Mexico 1994–2007: Growth Without Diffusion—Policy for Transitions

    Between 1994 and 2007, Mexico carried out one of the most far-reaching economic reforms in Latin America. In little more than a decade, the country moved from a state-led, inward-oriented development model to a deeply integrated export‑manufacturing platform anchored in North American value chains. The scale of the transformation was substantial: foreign direct investment averaged USD 18–20 billion annually by the early 2000s, manufacturing exports rose to more than 80 percent of total exports, and formal employment expanded rapidly in export corridors. For policymakers across Latin America and the Caribbean, Mexico’s experience is one of the clearest real-world tests of what happens when trade openness, foreign investment, and macro stability are allowed to drive structural change at speed.

    What is at stake for today’s policymakers is not whether integration can generate growth—it clearly can—but what kind of growth it generates, where it concentrates, and what capabilities it leaves behind. Mexico’s transformation produced globally competitive automotive and electronics clusters in the North and the center of the country. At the same time, large parts of the South remained trapped in low-productivity agriculture and informality. Real wages lost nearly 50 percent of purchasing power during the 1990s, employment cycles became tightly synchronized with U.S. demand, and domestic innovation capacity remained weak despite massive capital inflows. The result was a development pattern often described as “production without distribution”—high export performance combined with limited domestic upgrading and persistent territorial inequality.

    This blog addresses a challenge that is directly relevant to current policy debates on renewable energy, green industrialization, and regional development: how to design growth strategies that do more than attract capital. Drawing on Mexico’s experience between 1994 and 2007, it explains how the country’s human ecosystem—capital stocks, capital flows, institutions, and social cycles—was reconfigured; how evolutionary forces of variation, selection, and diffusion shaped winners and losers; and how the state’s choices as market architect amplified both successes and failures. The central proposition is that openness without deliberate capability building leads to fragile, uneven, and environmentally costly development paths.

    Hopefully, readers should come away with a sharper ability to distinguish between integration-led growth and capability-driven development, and with a clearer sense of which policy levers matter most when planning large-scale transitions—especially in energy systems that require long-term investment, learning, and territorial inclusion. The call to action is explicit: future industrial and renewable energy strategies must be designed not only to connect economies to global markets, but also to embed learning, resilience, and regional balance into the structure of growth itself.

    FDI selected winners, but the policy failed to diffuse

    Mexico’s capital stocks were reallocated toward export manufacturing, with the reallocation geographically concentrated. Formal employment expanded quickly in the second half of the 1990s: total employment rose from 33.9 million to 39.1 million between 1995 and 1999 (about 3.7% annually). At the same time, manufacturing became the dominant destination for foreign capital—by the early 2000s, FDI inflows averaged USD 18–20 billion annually, and manufacturing absorbed a large share of those inflows (about 53%). This concentration accelerated the build-out of industrial and urban assets in northern and central export hubs while leaving the agrarian South comparatively disconnected from high‑productivity networks. 

    Capital flows increased sharply and became structurally asymmetric—especially in the “import‑assemble‑export” structure of production. On the real economy side, Mexico’s export platform relied heavily on imported intermediates: raw material and intermediate imports grew at roughly 18.5% per year (1995–1999), indicating that a comparable deepening of domestic input industries did not keep pace with production expansion. On the labor side, internal migration surged northward toward export corridors. Still, knowledge spillovers remained modest because many plants operated as “assembly‑only” maquiladoraswith limited research and development and thin domestic supplier development. For policymakers, the key point is that rapid capital inflows can boost output without automatically building local capabilities unless policy deliberately strengthens learning and linkages. 

    Institutions were adjusted in ways that reduced investor uncertainty but weakened the inclusion and bargaining power of many workers and regions. NAFTA institutionalized trade rules and investor protections that served as durable “political risk insurance,” strengthening policy credibility beyond domestic political cycles. Yet social order became more fragile: domestic real wages lost nearly 50% of purchasing power in the 1990s following currency shocks and labor surplus. Labor institutions also became segmented—export plants often paid better than informal alternatives, but collective bargaining remained weak in many settings while informality expanded elsewhere. This matters for transitions: credibility and capital attraction are necessary, but social legitimacy depends on wages, working conditions, and distributional outcomes that markets do not fix on their own. 

    Social cycles became more externalized and volatile as manufacturing synchronized with U.S. demand. The early 2000s downturn is a concrete example: maquila employment fell by 17–18% between 2000 and 2003, showing how an externally driven model transmits shocks to domestic employment. Regionally, the divergence became persistent: poverty was around 57% and informality at roughly 70% in the South, versus roughly 40% informality in the North. This is not just inequity; it is a constraint on national productivity and political stability. For renewable energy, the parallel is direct: if grid upgrades, clean‑industry corridors, and skills systems concentrate only where institutions are already strongest, the transition can reproduce the same dualism—modern enclaves alongside regions left structurally unable to participate.

    Infrastructure chose regions

    In evolutionary terms, NAFTA was a major source of economic variation in Mexico. Trade opening introduced many “new variants” of production—new firm types, organizational models, and process standards—especially in autos, electronics, and other export platforms. Multinational firms brought modular production, just-in-time logistics, and global quality regimes (including ISO‑style standards) that reshaped the “work culture” of northern hubs. At the same time, regional initial conditions mattered: northern states were “pre-adapted” by stronger education and infrastructure. In contrast, southern states entered the period with weaker absorptive capacity and fewer connective assets. 

    Selection pressures then sorted these variants quickly and unevenly. The U.S. market served as the primary selective agent, rewarding proximity, speed, compliance with standards, and scale—especially in autos, electronics, and aerospace. In quantitative terms, higher-complexity states increased their share of national output (north rising from 39% to 42.7%), while less-diversified southern states saw their share decline (from 9.8% to 6.9%). Macro financial shocks also served as selection events: the 1994–95 crisis and the early 2000s downturn filtered out weaker firms. They reinforced the position of well-capitalized multinationals with access to global finance and technology, deepening foreign dominance in key export sectors. 

    Diffusion—the spread of practices, knowledge, and benefits—was the most incomplete stage of the evolutionary process. Some diffusion occurred within export supply chains: domestic suppliers upgraded in pockets due to quality and delivery requirements, and clusters formed in the Bajío and border regions through agglomeration effects. However, diffusion largely failed at a national scale because market failures in education, infrastructure, and finance prevented lagging regions from catching up. These factors served as diffusion barriers, keeping the South in a lower productivity “evolutionary trap.” The policy implication for transitions is operational: markets will generate variation (new technologies and projects) and selection (winners and losers), but diffusion (skills, suppliers, innovation capability, regional participation) requires explicit design.

    Risk was socialized, but capability was not

    The state’s central achievement during 1994–2007 was serving as a credible market architect. Mexico used NAFTA to “lock in” liberalization, signaling to global capital that the country would not revert to protectionism. Coordination then shifted toward sectoral programs and preferential conditions for multinational firms in autos and electronics, creating legal certainty and targeted support for export corridors. This approach was effective at attracting investment and scaling exports, but it also narrowed the state’s attention to what investors demanded rather than what domestic capability-building required. For transitions, this distinction is critical: credibility and market architecture can mobilize capital, but they do not guarantee domestic learning or broad inclusion unless those outcomes are built into the strategy. 

    Public investment was decisive—but spatially uneven—and that unevenness shaped long-run outcomes. Major public-private investments supported northern logistics, border crossings, and power grids to serve U.S. value chains. In contrast, infrastructure investment in southern states such as Oaxaca and Chiapas remained insufficient, contributing to “deficient economic institutionality” and weak FDI attraction. This pattern shows that infrastructure is not merely supportive; it is selection-shaping. When public goods concentrate in already‑competitive corridors, agglomeration strengthens, and divergence hardens. For today’s transition, the comparable risk is the buildout of transmission, ports, and industrial energy infrastructure, primarily in areas where industrial capacity already exists, thereby locking lagging regions out of clean‑industry participation. 

    In finance and risk management, the state served as a systemic shock absorber, most visibly during the 1995 crisis via the FOBAPROA bailout, prioritizing the survival of the financial system to maintain trade and investment flows. This preserved openness and investor confidence, but it also socialized risk and, by itself, did not create inclusive financing channels for domestic firms to upgrade. Growth reliant on external demand and foreign firms exposed Mexico to vulnerabilities when capital and demand cycles turned. For upcoming transitions—capital-intensive and exposed to price, currency, and policy shocks—this underscores the need for deliberate risk-sharing instruments and capital mobilization that build domestic balance sheets rather than just foreign project pipelines. 

    Innovation and learning were the state’s most significant gaps. While maquiladora learning was underway, Mexico lacked a robust national innovation capacity to move domestic firms from assembly to design and higher‑value activities, leaving the technology gap with the U.S. largely unclosed. In practice, this meant that many high-value functions remained abroad and that domestic upgrading was thinner than the scale of investment would suggest. For the future, the analogous risk is a transition dominated by imported technology and engineering, with limited domestic supplier upgrading in the construction delivery. A policy‑credible alternative is to treat innovation systems—technical institutes, supplier development, standards for learning, and finance for upgrading—as core infrastructure of the transition rather than optional add-ons.

    Transitions need diffusion by design

    Three core lessons from Mexico’s 1994–2007 experience stand out for policymakers. First, integration delivers scale, but it does not automatically enable development. Mexico successfully locked itself into one of the world’s most lucrative value chains, becoming a leading exporter of manufactured goods and generating millions of formal jobs. Yet the same period saw stagnant real wages, limited domestic firm upgrading, and heavy dependence on imported intermediates, underscoring that export growth alone does not create endogenous capabilities or sustained productivity gains.

    Second, regional divergence is not an accident—it is an outcome of policy design. Manufacturing clusters flourished in regions with strong infrastructure, logistics, energy systems, and institutional capacity, increasing the northern and central states’ share of national output from 39 percent to over 42 percent, while the South’s share declined. The absence of sustained public investment in southern education, connectivity, and productive infrastructure created an “evolutionary trap” in which lagging regions could not absorb knowledge or capital, even as the national economy expanded.

    Third, the state matters most in what it builds, not just in what it opens. Mexico’s government was highly effective at rule-setting, macro‑stabilization, and risk absorption—most notably during the 1995 financial crisis—but far less effective at fostering innovation systems, upgrading domestic suppliers, and diffusing beyond export enclaves. The state assumed an active role in shaping markets but did not fully develop comprehensive learning ecosystems. This imbalance explains why maquiladora learning remained shallow and why domestic research and development intensity stayed far below OECD benchmarks.

    The core message for today’s policymakers—especially those designing renewable‑energy and green industrial strategies—is straightforward. Investment attraction is necessary but insufficient. Clean‑energy transitions will replicate Mexico-style outcomes unless they are paired with deliberate policies for skills, local supply chains, innovation, and territorial inclusion. Energy infrastructure, like manufacturing infrastructure before it, will concentrate where institutions are strongest unless the state actively counterbalances market selection.

    The call to action is therefore strategic rather than technical: design transitions that treat learning, diffusion, and regional balance as core objectives rather than secondary benefits. Mexico’s experience shows that speed without structure creates growth that is vulnerable, uneven, and politically fragile. Today’s policymakers have the opportunity to apply these lessons early, building energy systems that not only decarbonize economies but also anchor inclusive, resilient, and capability-based development for decades to come.

  • Making Renewables Work: Brazil’s Transformation, 2010–2025

    Making Renewables Work: Brazil’s Transformation, 2010–2025

    Recent changes in Brazil’s power system provide a clear case study of rapid renewable-scale-up under real constraints, including droughts, high domestic interest rates, and land-use challenges. Between 2010 and 2025, Brazil added more than 30 GW of wind and tens of gigawatts of solar capacity, including distributed photovoltaics. Brazil fundamentally changed who produces electricity and how the grid operates. This case study shows how to lower prices through competitive procurement, mobilize capital through development finance, and build industrial capabilities. It also illustrates challenges—such as curtailment, licensing bottlenecks, and distributional conflicts—that can derail the transition process. 

    The region already has relatively clean energy matrices, and many countries are committed to expanding renewables—but lack the institutional and infrastructure capacity to make renewables reliable and socially legitimate. Brazil’s experience demonstrates the upside of market‑making and the downside of permitting processes and equity considerations lagging deployment. 

    Renewable energy plans should deliver four outcomes simultaneously: (1) low-cost supply, (2) drought resilience, (3) bankable investment contexts, and (4) credible social and environmental safeguards without depending on unsustainable fiscal subsidies. Renewable energy should be viewed as a systemic transformation, not just technology procurement. As such, changes to market rules, grids, financing, and governance are needed to enable wind and solar to scale without creating stranded assets or social conflicts. 

    This blog examines how the human ecosystem surrounding renewable energy has changed, what drove those changes, and what the state did to implement them. 

    Shifting assets, flows, and risks

    Capital stocks shifted from hydroelectric plants toward a more diverse portfolio, including wind, utility-scale solar, and mass-distributed solar. Wind capacity scaled from about 1 GW in 2010 to over 33 GW by 2025—leveraging the northeastern dry season to mitigate hydropower variability. Distributed solar expanded rapidly from less than 1 GW in 2018 to over 40 GW by 2025, with 3.7 million small-scale systems installed on homes and businesses. This diversification responded directly to drought-induced constraints on hydropower production, with wind and solar taking larger shares of the generation mix. 

    Capital flows shifted from state-centered lending and centralized dispatch toward blended finance for new market segments and more complex grid flows. Finance evolved from heavy reliance on BNDES toward de-risking strategies aimed at attracting institutional investors, including green debentures, with public finance playing a catalytic role. Electricity flows shifted as wind from the Northeast and solar from multiple regions fed the national system. Behind-the-meter generation helped address part of the supply challenge, but also created revenue‑model challenges for utilities. Knowledge deepened as firms adapted technologies to local conditions—for example, modifying wind turbines to match Brazilian wind regimes and turbulence. 

    Institutions co-evolved with these changes. New tensions emerged around land use for wind farms, electricity affordability, and the risks of boom‑and‑bust investment cycles. Brazil’s national energy regulator and energy planning agency institutionalized competitive electricity auctions, setting a benchmark across Latin America for transparent pricing and investor confidence. Social tensions were particularly acute where wind farms overlapped with traditional communities and required active management. The 2025 Ecological Transformation Plan highlighted the need for a just transition, emphasizing fairness and the impacts on communities, as well as the potential creation of 2 million jobs and a 0.8% increase in GDP. The drought and water crisis of 2021 accelerated diversification, while electricity bill increases of roughly 20% between 2021 and 2023 intensified pressure to reduce costs through renewables. 

    Crises, markets, and policy choices

    Brazilian energy policies deliberately encouraged experimentation across technologies and business models. Markets and crises then selected the most effective approaches, which diffused domestically and beyond Brazil. Policy generated diversity across technologies, ownership structures, and system solutions. Hybrid plants that combine wind, solar, and storage have emerged to address constrained transmission corridors in the Northeast. The free energy market expanded, enabling power‑purchase agreements that bypassed traditional utilities for large consumers. 

    Auctions and droughts pushed the system toward rewarding low-cost, complementary, and bankable projects in contrast to the fragility of large hydropower. Competitive auctions drove prices down until wind and solar outcompeted new thermal additions; by 2024, the levelized costs of new wind and solar were lower than maintaining expensive natural-gas-based backup capacity. The droughts of 2014 and 2021 forced systemic change, penalizing systems that lacked diversification or firm‑energy guarantees. Affordability became a primary driver as rising electricity bills increased pressure for lower-cost direct generation and diversified renewables. 

    Business models and generation systems that proved effective spread across Brazil and influenced regional peers. Brazil’s auction model informed procurement approaches in Colombia and Argentina. Infrastructure—particularly high‑voltage transmission lines—was critical to moving renewable energy from the North and Northeast to demand centers in the Southeast. Storage diffusion accelerated following regulatory advances beginning in 2023, aimed at managing the growing share of variable solar generation. 

    How the state made renewables bankable

    Brazil’s government acted not as a passive regulator but as a market‑maker and risk absorber. This approach focused on targeted state functions that unlocked private investment while maintaining reliability and social legitimacy. The state provided direction through long-term planning and institutional continuity, anchored in investments that outlasted political cycles. The 2025 Ecological Transformation Plan articulated this mission, projecting up to 2 million jobs and an average annual increase in GDP of 0.8% under full implementation scenarios. Planning entities and system operators prioritized reliability. The independence of the National Electric System Operator was critical in buffering political instability. The 2021 drought—the worst in roughly 90 years—severely depleted hydropower reservoirs, triggering emergency measures and reinforcing diversification as an energy‑security strategy.

    The state shaped market architecture through auctions, distributed‑generation legislation, bankability standards, and continuous adaptive management. Reverse auctions provided transparent price discovery and long-term contracts. Distributed generation legislation increased regulatory certainty and underpinned the rapid scaling of solar. The state also advanced green taxonomies and carbon‑market frameworks aligned with international standards. 

    The state mobilized capital for public investment and innovation ecosystems, but grid constraints became the binding bottleneck. BNDES concessional loans with local‑content requirements supported domestic wind‑manufacturing clusters. Transmission and interconnection emerged as strategic public goods, yet grid expansion lagged variable renewable deployment, contributing to curtailment. Eco‑Invest introduced mechanisms to hedge currency risk and reduce foreign‑exchange exposure for foreign investors. Public research and development supported agrivoltaics and floating solar on reservoirs, aiming to convert hydropower assets into hybrid generation hubs. 

    Three lessons from a big system transition

    Brazil’s 2010–2025 transition shows that renewable energy success rests on institutions—market rules, planning capacity, financial structures, and social safeguards—not just on installed capacity. The three key messages are:

    · Use auctions and clear contracting to drive costs down—but pair them with grid and permitting capacity, or curtailment and delays will destroy value.

    · Development finance can catalyze private investment and industrial learning, but over-reliance is fiscally risky—design a glide path toward capital‑market financing.

    · Social legitimacy is a system constraint: territorial rights, benefit sharing, and affordability must be embedded in market architecture, not treated as afterthoughts in licensing.

    Brazil demonstrated that a hydropower-heavy system can evolve into a diversified renewable powerhouse. The next step—for Brazil and the region—is to make the transition not only fast and low‑cost, but also grid‑secure, fiscally durable, and socially fair.

  • Chile’s Renewable Leap: What LAC Can Copy—and What to Fix

    Chile’s Renewable Leap: What LAC Can Copy—and What to Fix

    Chile shows that clean power can be a competitiveness strategy—not just an environmental commitment. In one decade, the country moved from about 63% fossil-fuel generation in 2013 to a system in which renewables provided about 70% of electricity in 2024, with solar and wind accounting for roughly one-third of national generation. 

    The hard part was not “getting renewables built.” The hard part was building systems that scale—grids, flexibility, permitting capacity, and social license—fast enough that cheap renewable power becomes usable power, not curtailed power. Chile’s experience makes this visible: solar and wind curtailment reached about 6 TWh in 2024, a warning sign that infrastructure and governance can lag private investment. 

    Chile’s transition was engineered through market design and state capability. Competitive auctions and long-term contracts drove prices down—bids reached US$13/MWh in the 2021 supply auction, with an average awarded price of US$24/MWh—and mining demand served as an anchor buyer through corporate power purchase agreements (PPAs). Transmission reform and institutional upgrades were aimed at keeping the system reliable as renewables grew. 

    For LAC countries, the prize is clear: lower power costs, stronger export competitiveness, and a credible path to transformation—without triggering backlash from communities or destabilizing the grid. This blog highlights what changed in Chile, why it changed, and why renewables won, and what the state did to turn private capital into scale, and where it still needs to catch up. 

    What changed: assets, money, power flows, and institutions

    Natural capital – the Atacama Desert’s solar resources – was converted into installed solar photovoltaic (PV) capacity. Capacity grew from below 500 MW in 2014 to more than 13 GW in 2024. Wind capacity expanded from 1 GW to over 4 GW in the same period. Socio-economic capital deepened through investment and new industrial energy portfolios. By 2023, there was a pipeline of planned renewable investments that exceeded US$ 15B, mostly foreign direct investment in Atacama solar, transmission, and storage. Mining and energy firms built new, long-term portfolios of utility-scale PV, wind, and storage assets to address risks from imported fuel prices and stabilize energy supply. Chile shifted culturally and institutionally toward “green energy” and away from “energy scarcity.” 

    Energy flows were decarbonized—but also constrained by the grid. Chile reduced fossil-fuel import dependence. Fossil-fuel generation accounted for about 63% in 2013, and renewables reached about 70% by 2024. Yet the success of attracting finance for generation created congestion: renewable curtailment reached around 6 TWh in 2024, because low-cost supply outpaced transmission and grid flexibility. Finance shifted toward competitive pricing and new instruments. Chile attracted low-cost renewable energy finance and shifted from conventional project finance to green bonds and sustainability-linked lending. Auction design and long-term contracting led to dramatic price reductions—solar bids fell from more than US$100/MWh in 2013 to about US$13/MWh in 2021, reinforcing capital reallocation toward renewables. Knowledge flows accelerated through learning-by-doing and improvements in system operations—new capabilities formed in grid management, dispatch, and storage integration. By 2025, 1.7 GW of storage was operational or in testing, with more than 1 GW operational by mid-2025, deployed in part to mitigate curtailment challenges. Public-private partnerships (e.g., through Chile’s Economic Development Agency, CORFO) illustrate that Chile was not only importing technology but also adapting it to national and local operating conditions. 

    Market institutions were reorganized around auctions and corporate PPAs. Chile’s auction system and bilateral contracting (especially for large customers) became central in steering investment. Mining companies became major renewable buyers through corporate PPAs, turning industrial demand into an ‘anchor’ that reduced risk and accelerated scale. Technical institutions such as the Electricity Coordinator (CEN) and the National Energy Commission (CNE) strengthened planning and dispatch to modernize the energy system, but coordination gaps remained. The Energy Transition Law (2024) was intended to expedite the adoption of transmission and grid-forming technologies—an institutional response to system complexity. Social order shifted with new distributional tensions. While renewables improved air quality in coal-heavy regions and supported competitiveness through lower prices, the changes led to conflicts over land use, transmission corridors, consultation, and water governance—especially in the Atacama Desert. 

    Why things changed: experimentation → market selection → rapid scaling

    Chile’s transition began with competing pathways to energy self-sufficiency: coal expansion, liquefied natural gas imports, and renewables. Over the decade, the system tested utility-scale PV, onshore wind, and concentrated solar power with storage, such as Cerro Dominador, as well as small-scale distributed generation projects (500 kW–9 MW) under stabilized pricing regimes. Hybrid projects pairing renewables with 4-hour battery energy storage systems also emerged to address intermittency. Policy innovation produced ‘institutional variation.’ A key reform was the auction redesign (2014 onward), which allowed renewable providers to bid into specific time blocks, enabling solar to compete with 24/7 thermal generation on a more comparable product basis. Spatial variation mattered: Atacama’s resource strength attracted mass deployment but also highlighted the importance of siting, grid access, and social license, leading to uneven project outcomes across different regions. 

    Cost-based selection strongly favored solar and wind. Competitive auctions and corporate procurement revealed solar as the cheapest scalable option; coal and other thermal assets lost viability when solar prices dropped to around US$13/MWh in 2021. Environmental and political selection accelerated coal decline, including through coal phase-out agreements accompanied by just transition strategies for communities. By 2024, 11 plants, or about 1.2 GW of coal capacity, had been retired or converted, reflecting both the direction of climate policy and shifting economics. Industrial selection, especially from mining, is reinforcing the case for renewables. Large mining firms (e.g., Codelco and BHP) selected renewables to lower costs and meet emerging ‘green copper’ demand, making export competitiveness a direct selection pressure. 

    Technology diffusion was rapid: solar and wind spread from Atacama/northern corridors toward central Chile as capabilities and financing templates matured. Storage diffusion followed the pressures that arose from curtailment. Institutional diffusion also occurred: the ‘Chilean model’ of auctions has been studied and adapted by other LAC countries (e.g., Colombia) to de-risk renewable energy pipelines. Diffusion depended on enabling infrastructure. Major transmission projects, e.g., the 1,500 km Kimal–Lo Aguirre line, were considered public goods and designed to connect Atacama solar to central demand. Diffusion thus required both market signals and grid build-out. 

    What the state did: markets, grids, risk, and legitimacy

    Chile used long-horizon planning and policy to provide a ‘North Star’ for investors and agencies. Energy 2050 is a state policy designed to outlast political cycles, in line with the direction set by the Framework Law on Climate Change. The state’s coordination role was essential because the climate transition is cross-sectoral. Energy policy interacted with mining competitiveness, environmental justice, and territorial governance; government convening and planning capacity shaped the pace and credibility of the transition. Where coordination lagged—especially between generation growth and grid expansion—system costs rose through congestion and curtailment, underscoring the state’s responsibility for sequencing reforms and infrastructure. 

    Technology-neutral auctions rewarded the lowest cost and created transparent price signals. Auction reforms and time-block design enabled renewables to compete credibly and delivered price discovery that reoriented investment away from fossil options. Grid access and system rules evolved to support higher variable renewable penetration. Changes included stronger technical agencies (CEN and CNE), modernization of the national energy system, and reforms to allow non-discriminatory grid access and stabilized pricing for smaller developers. Environmental and social standards were both enabling and constraining. Chile worked to streamline permitting and develop standards (e.g., green hydrogen certification and environmental impact assessments). But uneven local impacts—water use, land conflict, and Indigenous consultation—show that standards and enforcement capacity must scale with deployment. 

    Transmission reform was a decisive state intervention. The 2016 transmission law enabled long-distance solar integration, and the state treated major projects (e.g., the US$2B Kimal–Lo Aguirre high-voltage direct current line) as public goods essential for the transition. Public risk absorption catalyzed early investments and first-of-a-kind projects. Blended finance and early risk-sharing, including through state instruments and development finance, e.g., the Cerro Pabellón geothermal project, reduced barriers until private finance scaled. Innovation ecosystems were actively fostered. CORFO supported research and development and concessional finance for first-of-a-kind green hydrogen facilities and public-private initiatives, building Chile’s capacity to deploy and partially adapt technologies rather than only import them. 

    The LAC takeaway: build systems that scale

    Three headlines from Chile’s decade:

    · Market design can unlock scale. Technology-neutral auctions and bankable long-term contracts made renewables investable and drove dramatic price discovery.

    · Competitiveness anchors transitions. Mining demand and corporate PPAs helped convert renewable potential into real investment and industrial advantage. 

    · Success creates new challenges. When grid expansion and flexibility lag, abundance becomes waste: solar and wind curtailment in 2024, demonstrating that the transition’s bottleneck shifts from “building MW” to “integrating MW.”

    For LAC policymakers, some key lessons include that well-designed auctions and contracts can reward low-cost generation and deliverability; investing early in transmission and grid system flexibility as public goods prevents the grid from becoming a constraint; and building permitting and consultation capacity so projects have social license at the pace needed for deployment – legitimacy is as critical as finance. 

    It is not just about building more renewables – but about building systems that value reliable renewables and make them politically durable.

  • Brazil’s Transformation from 1930 to 1980

    Brazil’s Transformation from 1930 to 1980

    Brazil transformed from a coffee exporter to an industrial economy between 1930 and 1980. This is one of the most deliberate and consequential development experiments of the twentieth century. This was not simply a story of Brazil building “more factories.” It was an economy-wide transformation: what Brazil invested in, how capital moved through the system, which institutions gained influence, how cities expanded, how work and living conditions changed, and how the state learned to plan and coordinate long-horizon development. Within a single lifetime, Brazil built industrial platforms, expanded infrastructure, created development finance institutions, and assembled policy tools to mobilize investment over decades. But that transformation did not occur under a single political regime: after the 1964 military coup, industrialization was pursued under authoritarian rule, which increased technocratic insulation and centralized coordination while constraining labor politics and civic feedback—changing both the pace of growth and the distribution of its gains.

    For policymakers across Latin America and the Caribbean (LAC), Brazil’s experience remains relevant because many countries today face a comparable challenge under new conditions. The green transition, rapid technological change, and geopolitical fragmentation are forcing economies to adapt quickly while maintaining social cohesion. The core question is no longer whether economies will change, but whether that change will be shaped deliberately or left to shocks. Brazil illustrates what becomes possible when structural transformation is treated as a national project—and what can go wrong when investment and production expand faster than the institutions needed to manage inflation, external exposure, and distributional conflict. 

    This blog offers a practical reading of Brazil’s transformation through three lenses. First, it clarifies what changed—from physical capital and capital flows to institutions, social order, and the rhythms of boom and vulnerability. Second, it explains what drove those changes—how crises and policy choices generated new economic “experiments,” how some models were selected and scaled, and how capabilities diffused across the economy. Third, it identifies how the state made the transition possible—through direction and coordination, macro rules, infrastructure and public goods, financing and risk management, and the learning systems needed to adapt over time. The goal is not to romanticize the era or offer a blueprint, but to extract usable lessons: what to emulate, what to avoid, and which institutional capacities matter most when a country attempts to industrialize under uncertainty.

    Scale and composition of Brazil’s structural shift

    Brazil shifted from a primarily agricultural export economy to a major industrial economy between 1930 and 1980. Import substitution played a central role, and early heavy-industry platforms were built in steel, with the National Steel Company (CSN) established in 1941 and operating by 1946. Vale (1942) and Petrobras (1953) emerged as additional platform firms supporting minerals/logistics and energy, respectively. By 1980, manufacturing accounted for roughly 30% of GDP. 

    Import-substitution policies reduced reliance on imported manufactures and redirected capital toward domestic production. Brazil founded its National Bank for Economic Development (BNDE) in 1952 (later renamed BNDES) to finance national development, focusing on infrastructure and industry. Alongside development banking, major private banks such as Bradesco (1943) and Itaú (1945) expanded financial intermediation as the urban-industrial economy scaled. Foreign capital inflows became increasingly important—especially in the 1970s, when imports grew faster than exports—supporting investment in capital-intensive sectors such as energy (Petrobras) and heavy-industry supply chains.

    Economic planning and coordinated industrial policy became the norm. The 1956–1961 Goals Plan (Plano de Metas) reflected this growing planning capacity, prioritizing energy, transport, and industry to reduce bottlenecks and accelerate investment. This period also supported the expansion of national power capabilities through firms such as Eletrobras. BNDES played a long-term role in infrastructure and industrial finance and later expanded its use of capital-market instruments to channel funds toward development priorities. Brasília—constructed as a new federal capital beginning in 1956—became the flagship “planning-as-project” symbol of the era, bundling transport links, housing, utilities, and administrative functions into a single national initiative. The 1964 military coup marked a structural break in how this coordination operated. Planning and macroeconomic management became increasingly centralized and insulated from politics, as the authoritarian regime curtailed labor bargaining and constrained subnational autonomy. After 1964, the Government Economic Action Plan (PAEG) strengthened modern central banking functions and fiscal controls under conditions that enabled wage restraint and tighter political control, helping govern inflation and stabilize investment cycles that affected capital‑intensive champions such as Petrobras and Eletrobras, and later strategic manufacturers such as Embraer, founded in 1969.

    Brazil urbanized rapidly, rising from an estimated 30% urban in 1930 to about 68% by 1980, driven by massive rural-to-urban migration of roughly 20 million people. Large transport megaprojects also reshaped settlement dynamics—most notably the Trans-Amazonian Highway, initiated in 1970 as part of a national integration strategy. Industrial labor markets and labor politics became central features of development. During the military dictatorship, rapid industrial expansion was accompanied by explicit repression of organized labor and limits on collective bargaining. Wage growth was deliberately compressed as part of a broader strategy to stabilize inflation and raise profitability, allowing capital accumulation and industry to advance while postponing distributional adjustment. As a result, the “economic miracle” rested not only on productivity gains and investment surges, but also on authoritarian management of labor relations and income distribution.

    Brazil sustained very high growth for decades, averaging roughly 8% per year from the 1950s through the 1970s. Growth peaked between 1968 and 1974 at roughly 11% annual real GDP growth. This expansion coexisted with chronic inflation: inflation peaked around 100% in 1964, declined to roughly 19% by the late 1960s, and then rose again to around 80% per year in the 1970s. The post‑1964 decline in inflation reflected not only improved macroeconomic instruments but also the regime’s capacity to suppress wage‑price spirals through political control. While this strengthened short‑term investment predictability, it also masked unresolved distributional pressures that re‑emerged later as macroeconomic fragility.

    Shocks, policy choices, and the build-out of capabilities

    External shocks—including the Great Depression and World War II-era disruptions—pushed the state to experiment with new industrial activities, from steel and autos to capital goods. Coffee’s dominance in the export economy heightened this vulnerability: between 1889 and 1933, coffee accounted for roughly 61% of export earnings. When global demand collapsed, coffee prices fell sharply, and the state intervened aggressively, purchasing and destroying roughly 78 million sacks of coffee between 1931 and 1944. In the 1960s and 1970s, policy shifted toward export diversification and large-scale industrial upgrading. 

    The state protected domestic industry through tariffs, trade controls, and market structuring, allowing firms time to learn, invest, and scale. State enterprises focused on strategic sectors underprovided by private capital—especially in heavy industry. Output indicators underline the scale of industrial deepening: steel production rose from about 2.8 million tons in 1964 to about 9.2 million tons in 1976, while passenger car production increased from roughly 184,000 in 1964 to about 986,000 in 1976. BNDE/BNDES financed development priorities and later expanded industrial finance instruments, including a Special Agency for Industrial Financing (FINAME), a key mechanism for financing industrial machinery and equipment. 

    Energy and transport investments lowered system-wide costs and enabled industrial activities to spread beyond initial enclaves, including the São Paulo industrial core that had grown around the earlier coffee economy. Urbanization accelerated the diffusion of labor, skills, and markets, creating larger industrial labor pools and consumer demand. Policy frameworks and investment pipelines—often implemented through large development projects—helped replicate industrial capabilities across sectors, although regional gaps persisted and some areas remained underserved.

    Planning, finance, and public investment as development engines

    The Brazilian state guided development through planning and policy, beginning with import substitution in the 1930s and expanding into broader industrialization from the 1950s through the 1970s. Goal-based planning made priorities explicit and emphasized rapid structural change. After 1964, coordination became highly centralized under authoritarian rule, enabling technocratic agencies to scale investment, deliver major infrastructure projects, and expand export capacity with limited political resistance. This insulation accelerated execution but reduced feedback from labor, regions, and civil society.

    The state also pursued macroeconomic stabilization and institution building during the 1960s, including the PAEG program in 1964 and the creation and strengthening of central banking functions. It established trade and industrial-policy rules—tariffs, incentives, and credit allocation mechanisms—that shaped investment and protected learning-by-doing in manufacturing. These reforms proved more durable under authoritarian conditions that constrained wage demands and political contestation. However, by resolving macroeconomic tensions through repression rather than negotiated adjustment, the model accumulated vulnerabilities that became visible once external conditions tightened and political liberalization began.

    Public investment in infrastructure and public goods provided the base for industrial development. Investment prioritized energy and transport, reducing bottlenecks and enabling scale. In practice, this included major state-led expansion of power generation and distribution from the 1940s onward, especially large-scale hydropower that supported industrial growth. State-owned enterprises built the base for upstream industries such as steel, a critical input for machinery, construction, autos, and infrastructure. Under military rule, large-scale projects also served political and geopolitical objectives—symbolizing regime modernity, reinforcing territorial control, and channeling capital through centralized state institutions. Investment in human capital and social welfare lagged behind physical infrastructure, contributing to uneven progress and compounding the long‑run costs of rapid industrialization. Some 1970s integration projects, including frontier highways, generated environmental and social stresses that were weakly addressed under authoritarian conditions. 

    BNDES played a critical role in mobilizing long-term capital. It financed infrastructure and industrial development and later evolved instruments to support equipment investment and equity participation. Crowding in private and foreign capital was also central to the model, helping fund expansion in capital-intensive sectors. However, reliance on imported inputs, capital goods, and external financing increased exposure to global shocks—vulnerabilities that became more visible after the 1970s.

    Import substitution built foundational capabilities for industrial production and broader industrial ecosystems. However, investment often outpaced adaptive management: the model scaled rapidly but struggled to reconfigure toward sustained export competitiveness. Urbanization and infrastructure clusters helped spread knowledge and capabilities, but the uneven diffusion across regions contributed to distributional tensions that became harder to manage over time.

    Practical lessons on industrial policy, macro-stability, and inclusion

    Brazil’s development arc from 1930 to 1980 shows that structural transformation can be engineered—especially when the state plays a sustained role as strategist, builder, and financier. Over these decades, Brazil expanded industrial capacity and infrastructure, strengthened planning and development finance, and built institutional scaffolding capable of coordinating long-horizon investment. At the same time, the experience of industrialization under military rule highlights that coordination achieved through authoritarian action is limited. Growth acceleration after 1964 relied on suppressing distributional conflict rather than resolving it through durable institutions. As a result, Brazil built industry faster than it built legitimate stabilizers—credible macro rules, social compacts, and adaptive governance mechanisms—leaving the model exposed when external shocks and political liberalization arrived. 

    At the same time, Brazil’s experience shows that growth and industrial scale are not the same as resilience and inclusion. The model’s most important weaknesses were institutional and social, not merely technical—rapid expansion coexisted with persistent inflationary pressure and rising macro fragility. Urbanization outpaced housing and service provision, and the distribution of gains often lagged what was needed to sustain long-term legitimacy. In short, Brazil built factories and infrastructure faster than it built stabilizers—credible rules, risk management, and social compacts—that protect development gains when conditions change. 

    For LAC policymakers today, the most useful lesson is to treat development strategy as a balanced portfolio of state functions rather than a single policy tool. Direction and coordination matter—but so do macro rules that prevent inflation and external exposure from undermining investment. Public investment must build enabling platforms and be matched with financing systems that mobilize private capital while managing risk. Above all, governments need dynamic capabilities: the ability to learn, correct course, and upgrade competitiveness as technologies and markets evolve. Brazil’s story is a reminder that industrialization is not a single leap, but a sequence of choices made over decades. Countries succeed not by avoiding shocks, but by building institutions strong enough to adapt—so that transformation becomes a source of shared prosperity rather than recurring vulnerability. 

  • What Coffee Did That Rubber Didn’t: Brazil, 1879–1912

    What Coffee Did That Rubber Didn’t: Brazil, 1879–1912

    Between 1879 and 1912, Brazil experienced two commodity booms that unfolded simultaneously within the same country and under the same global economic forces, yet produced radically different long-term outcomes. Rubber and coffee both connected Brazil to world markets, generated export revenues, and attracted labor and capital. But only one of these commodities helped build durable institutions, accumulate productive capabilities, and lay the groundwork for sustained development. The other collapsed, leaving behind wealth and growth but no transformation.

    This contrast matters well beyond Brazilian history. Across Latin America and the Caribbean, policymakers continue to grapple with a familiar dilemma: how to convert commodity abundance into long-term prosperity. Natural resources remain central to national economies, whether in agriculture, mining, energy, or biodiversity-based products. Yet the region’s experience shows that export success alone is not enough. What matters is how production is organized, how labor is incorporated, how infrastructure is built, and—above all—how the state engages with markets over time.

    The comparison between rubber and coffee offers a powerful lens for examining these issues. Rubber was extracted from the Amazon under conditions of weak governance, fragmented markets, coercive labor systems, and minimal state coordination. Despite Brazil’s near-monopoly position in global rubber markets, the boom proved fragile and collapsed rapidly once external competition emerged. Coffee, by contrast, became embedded in a denser institutional environment in São Paulo and the Southeast. It helped generate transport, finance, regulation, and labor systems that gradually aligned private incentives with public capacity. Over time, this alignment enabled adaptation, learning, diversification, and ultimately industrialization.

    Coffee production was not benign or equitable, nor was rubber doomed by nature or geography alone. Instead, this blog demonstrates how distinct institutional choices and state roles shaped the evolution of two commodity systems under similar external conditions. For contemporary policymakers and citizens alike, the lesson is clear: development is not determined by what a country exports, but by how economic activity is governed, coordinated, and allowed to evolve.

    How rubber and coffee rewired Brazil’s economy

    Between 1879 and 1912, Brazil underwent substantial economic and social transformations centered on rubber and coffee. Rubber was exported primarily as latex, with minimal value-added processing, whereas coffee production required processing, transportation, and the development of financial intermediation capacity. Rubber followed a classic boom‑and‑bust cycle, while coffee evolved through a longer-term, managed cycle.

    Rubber-producing cities such as Manaus and Belém expanded rapidly in the Amazon, while São Paulo grew as the center of the coffee economy. However, whereas population settlement in São Paulo was persistent, migration to the Amazon was more precarious and often reversible, with substantial return migration following the collapse of rubber prices. The Amazonian rubber economy relied on a transient labor system, while coffee production anchored migrants more durably into local demographic structures.

    Infrastructure investments in both the Amazon and Sao Paolo focused on ports, river steam navigation, and railways in areas where sufficient resources and political coordination were available. Despite export growth, most of Brazil remained poorly integrated and underdeveloped.

    Skill formation remained limited, particularly in the rubber economy, where production remained centered on extraction. Nevertheless, there was significant migration from northeastern Brazil to the Amazon and from Europe to São Paulo. Formal education systems advanced little during this period. Rubber extraction required minimal training and relied heavily on local ecological knowledge, whereas coffee production demanded agronomic, financial, and logistical expertise that could be accumulated, transmitted, and diffused regionally.

    Institutional capacity expanded significantly in São Paulo through taxation, rail regulation, and financial development. In contrast, the Amazon retained an informal, personalized governance structure characterized by weak, coercive authority and limited support for public goods. These patterns persisted after the fall of the Empire in 1889, as regional oligarchies consolidated power and continued their respective development paths. Social systems were highly hierarchical, with extreme inequality between owners and indigenous or migrant laborers, often enforced through violence.

    The rubber boom required relatively limited transformation of natural ecosystems, as latex was extracted directly from dispersed wild Hevea trees. Coffee cultivation, by contrast, required extensive land‑use conversion and soil depletion, pushing agricultural frontiers deeper into forested areas. In both systems, natural capital was treated as effectively inexhaustible.

    Coffee elites acquired national prominence and political influence. In contrast, wealth and power in the rubber economy were concentrated among the so-called “rubber barons,” who remained socially and culturally isolated within the Amazon. Rubber production relied heavily on debt peonage and coercion to secure labor, frequently accompanied by extreme violence, while coffee plantations gradually transitioned toward wage labor and contractual arrangements.

    Export rents from rubber were largely consumed or transferred abroad, including investment in luxury projects such as the Manaus opera house, rather than reinvested in productive diversification. 

    Why did the two systems evolve differently?

    In the rubber economy, production was constrained by an extractive system that could not be scaled efficiently because trees were widely dispersed and extraction techniques changed little over time. Coffee, in contrast, could be scaled through plantation agriculture and supported by innovations in transport, finance, and labor organization. Rubber production was structured around patronage-based debt networks between traders and tappers, whereas coffee was organized through firms, banks, transport systems, and export houses. The Amazon posed severe logistical challenges, including limited connectivity, high disease burdens, and weak or nonexistent institutions. The Southeast, by contrast, benefited from ports, railways, skilled migrants, and dense financial networks.

    Rubber succeeded as a raw material primarily in the absence of external competition. The industry collapsed rapidly once Asian plantation rubber entered global markets. Initial rubber profits were high but volatile and fragile. Coffee remained competitive as economies of scale expanded, supporting infrastructure development and improved coordination. Although coffee margins were lower, the system proved more resilient to external shocks, in part because coffee-growing regions developed institutions aligned with market needs. Rubber regions failed to institutionalize learning or adapt their production model.

    As an extractive industry, rubber exhibited little innovation and remained locked into coercive labor arrangements. Coffee production evolved in response to competition, developing increasingly sophisticated financial, logistical, and contractual systems. São Paulo later built on these institutional foundations to transition to industrialization after 1910.  

    The state makes a decisive difference

    In the early stages, the state played a limited role in both coffee and rubber, beyond promoting export expansion and relying heavily on commodity rents. Over time, coffee elites gained influence over federal policy, while rubber elites remained politically isolated and lacked national leverage. As infrastructure and public services expanded in São Paulo, the state assumed a progressively more legitimate and active role. In the Amazon, the absence of state authority enabled coercive labor practices and land appropriation, whereas in São Paulo, property rights, contract enforcement, and financial regulation became increasingly important for coffee production.

    Coffee production in São Paulo and the Southeast became embedded within strong state governments that developed fiscal, administrative, and coordination capacities. These governments actively shaped markets through infrastructure investment, immigration policies, banking development, and price management. By contrast, the rubber boom unfolded largely in the absence of effective state presence, with government involvement confined primarily to export taxation and territorial sovereignty. Coordinated market governance proved essential for stabilizing coffee prices amid external shocks, whereas such mechanisms were absent in the rubber economy. Labor systems in rubber production remained characterized by debt peonage, coercion, and violence, whereas coffee production gradually transitioned toward regulated free labor following abolition, supporting longer-term development. Political alignment between São Paulo, the Southeast, and the federal government was critical in securing national support, whereas the Amazon’s limited political power translated into minimal federal assistance.

    Rubber extraction depended almost entirely on river transport, and attempts to extend rail infrastructure—such as the Madeira–Mamore railway—were extraordinarily costly and often disastrous. Railways, ports, and financial institutions were central to the expansion of coffee. Coffee benefited from coordinated export systems, while the rubber market remained fragmented and predatory. In São Paulo and the Southeast, infrastructure development was part of an integrated, state-led process linking politics and the economy, creating durable institutions and enabling diversification. In the Amazon, rubber production was driven by the boom itself, with limited state involvement in long-term development or institutional durability.

    Export taxes played an important role in both systems, but were not effectively deployed to promote diversification or stabilization. The state proved unable to respond to the displacement of Amazonian rubber by Asian production after 1912. In contrast, the coffee sector adapted through price management and institutional evolution, supporting a gradual transition toward industrialization. 

    Lessons for development policy

    The Brazilian experience between 1879 and 1912 demonstrates that commodity booms are not inherently a curse or a blessing. They are moments of choice. Rubber and coffee generated wealth under similar global conditions, yet only one sustained a trajectory of development. The difference lay not in prices or demand, but in institutions, governance, and the evolving relationship between the state, markets, and society.

    Rubber’s collapse was not caused by a lack of global importance—Brazil supplied the vast majority of the world’s rubber at the height of the boom—nor by a lack of profits. It failed because production remained locked into an extractive model that discouraged learning, relied on coercion rather than contracts, fragmented markets, and operated largely beyond the reach of effective public authority. When competition arrived, the system had no capacity to adapt or shift focus. Coffee, by contrast, faced recurring crises of overproduction and price volatility, yet proved more resilient because it was embedded in institutions that enabled coordination, investment, and gradual transformation.

    For Latin America and the Caribbean today, this historical comparison carries a direct and practical message. Commodity-based growth can support development only when it is accompanied by deliberate efforts to build state capacity, regulate markets, protect labor, and reinvest rents into productive systems. Infrastructure without institutions is fragile. Market power without coordination is fleeting. And growth without learning rarely endures.

    As the region confronts new commodity frontiers—from energy transition minerals to artificial intelligence to biodiversity-based products and climate-related services—the question is not whether these resources can generate exports, but whether they can be embedded in economic systems that promote resilience, inclusion, and adaptation. Brazil’s past shows that outcomes are not predetermined. It is shaped by policy choices, political coalitions, and states’ willingness to move beyond extraction toward governance.

    History does not offer simple templates, but it does offer warnings—and possibilities. The tale of rubber and coffee ultimately reminds us that development is built not on commodities themselves, but on the institutions that grow around them.