structural transformation in ecuador

6. Analyzing Ecuador’s Efficient Frontier Productive activity requires different types of inputs, some of which are provided by the market while others are provided by the government. Among the latter, some are public goods in the sense that they are non-rivalrous and non-excludable, such as property rights, regulation, security, and certification rules. Others do not have those characteristics but have been taken over to a large extent by governments because of other forms of market failures, including infrastructure, education, labor training, and certification services.

The sector specificity of these public inputs is reflected in the fact that countries have literally hundreds of thousands of pages of economically relevant legislation and hundreds of government agencies. Each one of these pages of legislation and each public agency have a differential effect on different sectors.

The high number of public inputs is not unlike the plethora of privately provided inputs.

However, public inputs suffer from the fact that most of them have no price, so there is no decentralized mechanism to reveal information. Moreover, there is no clear incentive for governments to respond to the information, as the profit motive is not a relevant or powerful incentive for public policy. Even if the information and incentive problems are addressed, the government often does not have a decentralized self-organizing mechanism to mobilize resources: these are most frequently mobilized through centralized budgetary processes.

This creates major challenges for public policy. First, how to ensure the best possible provision of public inputs to existing activities, given the information, incentives and resource mobilization problems mentioned above? Second, how to identify the industries that could have existed with an alternative provision of public inputs but that do not exist precisely because of these missing inputs?

Luckily, such efforts can be guided by the rich set of data and indicators that we have used in this paper, which allow us to systematically scan Ecuador’s opportunity space and evaluate which sectors should be easier for Ecuadorian firms to enter versus those that would be more difficult, and which sectors would be worth the effort versus those without much strategic value.

A first pass at understanding the nearby opportunities for structural transformation in Ecuador is simply to identify those sectors that are nearest to the existing capability set in which 30