BRAZIL HAS PURSUED INDUSTRIAL POLICY FOR NEARLY A CENTURY, YET PRODUCTIVITY KEEPS FALLING

BRAZIL HAS BEEN IMPLEMENTING SOME FORM OF INDUSTRIAL POLICY FOR ALMOST 100 YEARS. SINCE THE MID-20TH CENTURY, THE COUNTRY HAS RELIED ON STATE INTERVENTION, SUBSIDIES, TAX INCENTIVES, AND TRADE BARRIERS AS TOOLS TO PROMOTE AND “PROTECT” ITS DOMESTIC INDUSTRY. THE ORIGINAL GOAL WAS TO BUILD A STRONG, SELF-SUFFICIENT MANUFACTURING BASE AND REDUCE DEPENDENCE ON IMPORTS.

DESPITE THIS LONG-TERM STRATEGY, THE RESULTS HAVE BEEN DISAPPOINTING. INDUSTRIAL PRODUCTIVITY IN BRAZIL HAS BEEN FALLING BY AROUND 0.9% PER YEAR. IN PRACTICAL TERMS, THIS MEANS THAT BRAZILIAN FACTORIES ARE PRODUCING LESS VALUE PER WORKER, PER MACHINE, AND PER HOUR WORKED OVER TIME. INSTEAD OF BECOMING MORE EFFICIENT, THE INDUSTRIAL SECTOR HAS BEEN LOSING COMPETITIVENESS.

ONE OF THE CORE FEATURES OF BRAZIL’S INDUSTRIAL MODEL IS ITS RELATIVELY CLOSED ECONOMY. THE COUNTRY MAINTAINS HIGH IMPORT TARIFFS, COMPLEX REGULATIONS, AND NUMEROUS NON-TARIFF BARRIERS THAT LIMIT THE ENTRY OF FOREIGN PRODUCTS AND COMPANIES. THE JUSTIFICATION IS CONSISTENT: FOREIGN COMPETITION MUST BE RESTRICTED IN ORDER TO PROTECT LOCAL INDUSTRY.

IN PRACTICE, THIS PROTECTION OFTEN PRODUCES THE OPPOSITE EFFECT. BY SHIELDING DOMESTIC COMPANIES FROM INTERNATIONAL COMPETITION, THE SYSTEM REDUCES PRESSURE TO INNOVATE, CUT COSTS, AND IMPROVE PRODUCTIVITY. FIRMS THAT DO NOT FACE STRONG COMPETITORS HAVE LESS INCENTIVE TO INVEST IN NEW TECHNOLOGIES, MODERN PRODUCTION METHODS, OR WORKFORCE SKILLS.

A CLEAR EXAMPLE CAN BE SEEN IN THE MARKET FOR INDUSTRIAL INPUTS AND CAPITAL GOODS. MACHINERY, ELECTRONIC COMPONENTS, INDUSTRIAL EQUIPMENT, AND CHEMICAL PRODUCTS ARE FREQUENTLY MORE EXPENSIVE IN BRAZIL THAN IN MORE OPEN ECONOMIES. LIMITED COMPETITION ALLOWS HIGHER PRICES AND OFTEN LOWER QUALITY COMPARED TO INTERNATIONAL STANDARDS.

THE CONSEQUENCES EXTEND FAR BEYOND MANUFACTURING ITSELF. WHEN INDUSTRIAL INPUTS ARE MORE EXPENSIVE, OTHER SECTORS OF THE ECONOMY SUFFER. AGRIBUSINESS, CONSTRUCTION, AND SERVICES ALL FACE HIGHER COSTS, WHICH REDUCES THEIR ABILITY TO COMPETE INTERNATIONALLY. FOR CONSUMERS, THE RESULT IS SIMPLE: HIGHER PRICES, FEWER OPTIONS, AND SLOWER TECHNOLOGICAL UPGRADES.

THE AUTOMOTIVE SECTOR ILLUSTRATES THIS DYNAMIC WELL. IT HAS BEEN ONE OF THE MOST PROTECTED INDUSTRIES IN BRAZIL FOR DECADES, BENEFITING FROM TAX BREAKS, LOCAL CONTENT REQUIREMENTS, AND IMPORT RESTRICTIONS. EVEN SO, CARS PRODUCED AND SOLD IN BRAZIL ARE OFTEN MORE EXPENSIVE AND, IN MANY CASES, TECHNOLOGICALLY OUTDATED WHEN COMPARED TO MODELS AVAILABLE IN MORE OPEN MARKETS.

DESPITE HEAVY PROTECTION AND GOVERNMENT SUPPORT, BRAZILIAN INDUSTRY HAS CONTINUED TO LOSE SHARE IN BOTH GDP AND GLOBAL TRADE. THE COUNTRY EXPORTS RELATIVELY FEW HIGH VALUE-ADDED MANUFACTURED GOODS AND REMAINS HEAVILY DEPENDENT ON COMMODITIES. THIS MAKES THE ECONOMY MORE VULNERABLE TO GLOBAL PRICE CYCLES AND EXTERNAL SHOCKS.

IN ESSENCE, A MODEL BASED ON TRADE BARRIERS, EXCESSIVE PROTECTION, AND PERMANENT STATE INTERVENTION HAS FAILED TO DELIVER THE PROMISED RESULTS. AFTER DECADES OF INDUSTRIAL POLICY, PRODUCTIVITY IS FALLING, COSTS ARE HIGH, AND THE INDUSTRIAL SECTOR CONTINUES TO STRUGGLE WITH STRUCTURAL WEAKNESSES.

THE KEY QUESTION NOW IS WHETHER IT MAKES SENSE TO KEEP REPEATING THE SAME STRATEGY AND EXPECT DIFFERENT OUTCOMES, OR WHETHER BRAZIL NEEDS TO RETHINK ITS APPROACH BY EMBRACING GREATER TRADE OPENNESS, MORE COMPETITION, AND REAL EFFICIENCY GAINS AS THE FOUNDATION FOR A STRONGER INDUSTRIAL SECTOR.