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A guiding star for industry

Books discuss ways to address the deindustrialization of Brazil’s economy

040-044_Desindustrializacão_239-01In the mid-1980s, manufacturing—the industry that converts raw materials into products, was responsible for one-fourth of Brazil’s Gross Domestic Product (GDP). By 2004 that percent had fallen to 17.9%, and in 2014, stood at 10.9%, according to figures from the Brazilian Institute of Geography and Statistics (IBGE). The roots of this situation—the deindustrialization that is casting a shadow over several of the world’s economies besides Brazil’s—and the policies that could reverse the trend have been the subject of intense debate in academic circles in this country. Three recently-published books offer complements to the arguments and dissents that are on the table. Published in 2013, O futuro da indústria no Brasil – Desindustrialização em debate [The future of industry in Brazil – Deindustrialization under discussion] compiled by economists Edmar Bacha and Monica Baumgarten de Bolle, is critical of the direction taken by Brazilian industrial policy in the recent past. The recurrent theme in the analysis presented in its 17 chapters is that to make industry more competitive, the economy must be opened up further and incentives created that benefit all segments of industry, not just selected ones. Necessary measures include simplification of tax law and establishment of competitive foreign exchange rates. The book is the result of a pair of seminars sponsored by the Institute of Economic Policy Studies/Casa das Garças, headed by Bacha, held in Rio de Janeiro in April and June 2012.

The 2015 work Indústria e desenvolvimento produtivo no Brasil [Industry and productive development in Brazil] contains articles that take a less skeptical and more diverse view of the usefulness of policies that promote industrial activity, although the authors by no means reached a consensus about the features of such policies. The book was edited by Nelson Marconi and Maurício Canêdo Pinheiro, professors from the Getulio Vargas Foundation, Laura Carvalho, from the School of Economics, Business Administration and Accounting at the University de São Paulo (USP), and Nelson Barbosa, current minister of finance. Lastly, the book Indústria, crescimento e desenvolvimento [Industry, growth, and development], edited by Flávio Vilela Vieira, presents the results of a research project that involved professors from the Institute of Economics at the Federal University of Uberlândia in Minas Gerais that focused on the relationship between the industrial sector and economic development.

If there is a common denominator in these three volumes, it is the idea that industry’s accentuated loss of vigor is harmful for Brazil because of manufacturing’s potential for producing innovations, achieving productivity gains, and generating wealth. But some economists vehemently challenge deeply rooted ideas, such as that the rising importance of the services sector is a factor in the fragility of economic development or even that the increase in commodities exports at the expense of manufactured goods is a sign of a backward slide into the past.

In one of the chapters of O futuro da indústria no Brasil, Sergio Lazzarini, Marcos Jank and Carlos Inoue argue that the commodities boom from which Brazil benefited in the first decade of this century is a “blessing” rather than, as some experts claim, a curse. In 2001, agricultural commodities, fuels, minerals and metals accounted for less than half of Brazilian exports. Ten years later, that share had risen to 70%. The authors demonstrate that some Brazilian commodities have a value added comparable to or even greater than industrialized products because they have been experiencing productivity gains due to innovation, and since world prices are higher than they were decades ago.

“If a product is the result of locally-constructed capabilities and is part of a global production chain, it does not matter whether it is a “commodity” or not. Soy, for example, is a component of a chain. It needs fertilizer, machinery, and research. Those things have to be developed. You can export soy in natura and there will be an entire production chain supporting that,” says Lazzarini, who is a professor of organization and strategy at INSPER – Institute of Education and Research. “There is plenty of room for encouraging more technological research tied to commodities chains instead of directing tax credits and incentives to other chains that have less competitive potential,” argue the authors, who propose using government revenues, such as petroleum exploration royalties, to invest in funds that permit diversifying the economy and would not leave Brazil hostage to fluctuations in the prices of a limited group of commodities. The trio of authors suggests that investing in commodity processing industries is desirable only if that process adds value and productivity to the final product, which is not always the case.

Author of a chapter entitled, “Padrões de política industrial: A velha, a nova e a brasileira” [Patterns of industrial policy: The old, the new, and the Brazilian], economist Mansueto de Almeida criticizes the sectoral incentive policies adopted by the Brazilian government in the early 2000s. According to Almeida, they were based on the model adopted by South Korea in the 1960s and 1970s. “But instead of promoting diversification of production, the model granted subsidized credit to big companies that operated in sectors where Brazil already had obvious competitive advantages, like foods, petroleum, and mining,” he says. In his opinion, investing in selected sectors would have made sense at a time when the production chains were domestic. “They no longer are local. Each part of the process is in some other country or some other part of the world,” he says. He advocates a production development policy that makes the economy as a whole function better, improves infrastructure, simplifies bureaucratic rules, and reduces the tax burden horizontally. On a parallel plane, the role of government should be to promote an aggressive policy in support of innovation, something that Almeida maintains is much less onerous than sectoral policies.

Mariano Laplane, a professor from the Institute of Economics at the University of Campinas (Unicamp), says some of the criticism of the stimulus given by the government to big Brazilian companies is exaggerated. He says it is important that this country’s conglomerates expand their business to other countries and become global. “The public interest is served when an industry is encouraged to globalize and become more innovative. That is a kind of contemporary industrial policy that many countries, such as China and South Korea, are following,” says Laplane. “We were living in a dichotomous world where on the one side there were those who argued that we had to close the economy and replace imports, while others saw any kind of industrial policy as crime. We won out and were able to have a sophisticated industrial policy that is neither from the 1950s nor the laissez-faire of the 1990s,” says the researcher, who is president of the Center for Strategic Studies and Management in Science, Technology and Innovation (CGEE), an institution affiliated with the Ministry of Science, Technology, and Innovation.

040-044_Desindustrializacão_239-02Laplane points out what he believes is a flaw in the debate about reindustrialization strategies. “There is confusion between industrial policy and anti-crisis policies. Industrial policy relates to encouraging innovation and making companies more competitive. It has to do with changing the industrial structure to prepare it for an increase in innovation, dynamism, and productivity. It should not be confused with policies intended to combat the recession, such as reducing burdensome payroll levies or raising taxes on vehicle imports,” he says. “We have made progress in the sophistication of instruments of innovation policy and improved the legal framework. We are taking the first steps in that direction. A good number of our companies, both Brazilian and foreign, agreed on that strategy not long ago,” he says. To advance more rapidly we must invest more in research and development (R&D) at companies, universities, and research institutions. “Some of that effort has to be done with public funds, but right now money is short. It is essential to win the support of public opinion so that innovation is seen as a priority,” says Laplane, who wrote a chapter on innovation and competitiveness in Indústria e desenvolvimento produtivo no Brasil.

Laplane and the other authors of the book participated in a seminar held in São Paulo in May 2014 by the Brazilian Institute of Economics (IBRE) and the São Paulo School of Economics, both associated with the Getulio Vargas Foundation (FGV), and were invited to write about the topics of their presentations. “The purpose of the seminar was to spur discussion in order to produce the book, but not all the invited participants were available to write chapters. This meant there was a slightly higher concentration of those authors who are more sympathetic to industrial policies,” says Maurício Canêdo Pinheiro, an IBRE researcher who edited the FGV book and also contributed a chapter to the Casa das Garças work. “These are two books that talk to each other and are useful for understanding and discussing the subject.” One of the outcomes of the FGV seminar was the formation of a group of studies about reindustrialization in the context of the Brazilian Association of Machinery and Equipment Manufacturers (ABIMAQ). Another seminar will probably be held in 2016 in partnership with the Federation of Industries of the State of São Paulo (Fiesp) and may result in a new book devoted to policy proposals.

In the chapter he wrote for the FGV book, Pinheiro discusses recent Brazilian industrial policy for the oil and gas sector. He found that the requirement that services and goods be purchased from Brazilian companies, the so-called local content rule, did not help ensure the insertion of those Brazilian companies into chains of international suppliers. “Industrial policy based on some type of protection works well only if there is a sunset date, if it serves to expose companies to competition,” he says. “The oil and gas companies that produce in Brazil are competing with companies in other places that buy their inputs wherever they choose. How can we compete with them?” In Pinheiro’s opinion, it makes sense to assist specific sectors only if those industries have a chance to develop competitiveness within a reasonable time frame. “Moreover, these certainly should not be labor-intensive industries, because there are plenty of countries that have very cheap labor, unless we agree to work according to their rules and pay extremely low wages,” he says.

Another editor of the book, Nelson Marconi, a professor at the São Paulo School of Economics at the FGV, argues that designing an industrial policy without first bringing certain macroeconomic indicators into alignment is a waste of money. “You need an exchange rate that makes companies competitive, and you must ensure profit margins sufficient to encourage businessmen to invest,” he says. “It is also necessary that average wages in industry rise along with increases in productivity and that public tariffs are aligned so companies will not experience any unexpected losses of revenue,” he says. One prerequisite for industrial policy, according to this economist, is to establish targets and enforce them so that the recipient companies become more competitive—goals such as volume of exports, employee training, and investment in R&D. “It is vital that the investment produces a return for the country.”

040-044_Desindustrializacão_239-03Marconi is cautious about giving privileges to certain sectors. “Perhaps the results would be better if we had a policy for encouraging innovation and R&D that reaches all segments,” he says. But if we have to select one sector, he explains, there are two features that need to be taken into consideration: one that it generates innovation, and the other that the innovation can be used by other sectors, promoting what he calls “relevant production chains.” Marconi cites the health care sector as a possible target. “The Brazilian population is aging, and a program of innovation oriented toward the health care sector could even help us to develop neighboring sectors in which we have fallen behind, such as electronics, as well as the machinery and equipment industry and some services sectors.”

Creating jobs should also be a goal, but the relationship need not be direct. “Generating innovation and employment at the same time is not easy, because innovation often leads to job loss. But it is reasonable to assist sectors that create new occupations around them, especially jobs in the services sector,” says Marconi. One example, he observes, is the textile industry, where growth can spur employment in areas associated with fashion, design, logistics, marketing, and others. “It is essential to incorporate innovations into the production process that differentiate your product. You can’t think about developing a policy for competing directly with Vietnam or Ethiopia, because labor costs are very low in those countries,” he says.

Detail of the mural by Mexican artist Diego Rivera at the Arts Institute in Detroit, Michigan USA

Reproduction by Thomas Hawk/FlickrDetail of the mural by Mexican artist Diego Rivera at the Arts Institute in Detroit, Michigan USAReproduction by Thomas Hawk/Flickr

Comparisons with the strategies adopted by China, which grew at rates of 10% a year for more than two decades, and South Korea, which developed a technology industry starting in the 1970s with assistance from the State, are examples frequently cited in discussions about Brazil’s ability to reindustrialize. In the case of China, certain lessons can be learned, observes Flávio Vilela Vieira, editor of Indústria, crescimento e desenvolvimento. “One that stands out is the importance of adopting policies that can stimulate competitiveness in the exports sector and that maintain a dynamic and competitive industrial sector. It is also important that there be high rates of investment in the economy and structural policies that can improve the institutional environment,” wrote Vieira, who calls attention, however, to the fact that economic development in both China and India is still low when measured in terms of per capita income. “This enables those economies, by adopting necessary policies and reforms, to achieve high economic growth rates that cannot be duplicated at the same magnitude by other economies that have already experienced the stage of economic development during which their per capita income levels rose.”

In the case of South Korea, articulation between industrial and scientific policies helped certain privileged sectors of industry to achieve a high degree of technological intensity. “The State proved to be extremely competent in its economic actions, using incentive mechanisms and disciplining private capital,” wrote Thais Guimarães Alves, a professor at the Federal University of Uberlândia. International experiences are important references, but as Mariano Laplane from Unicamp observes, they always have limitations. “The strategies employed by South Korea or Israel may be inspiring but they were implemented under conditions very different from ours. We have a sophisticated and complicated structure. And that is the one that must serve as our foundation for progress,” he says.