Government imitates powers with industrial policy, but didn’t do its homework

The Luiz Inácio Lula da Silva (PT) government has invested in a “neo-industrialization” program for the country under the argument that the world’s large economies are resuming efforts in industrial policy.

In addition to President Lula, his vice-president, Geraldo Alckmin (PSB), and the president of BNDES, Aloízio Mercadante, cited, in defense of the recently launched Nova Indústria Brasil (NIB) program, examples of world powers that have encouraged specific sectors via credits subsidized, reaffirming the belief in the State that induces development.

The program, which will allocate R$300 billion – the majority via BNDES – to lift the national industry from stagnation, received criticism for repeating policies that had already been tested and that did not work. At the launch, the president of the development bank rebutted the criticism and compared the initiative to policies implemented by China and the United States.

“I want to ask those who write every day saying that we are bringing in old measures: explain to me China. Why is China the fastest growing country in the world for 40 years? Explain to me American economic policy: subsidies, incentives, investment public, attracting companies, including Brazilian ones, that are going there for these subsidies, which they receive up front, in money from the Treasury”, emphasized Mercadante.

The question regarding China received responses from liberal economists on social media, demystifying the comparison. The argument is that the PT member did not consider that one of the main drivers of Chinese development was precisely the opening to foreign trade, by leader Deng Xiaoping, from the end of the 1970s. The measure ended the isolation in force since the adoption of the communist regime of Mao Tse-Tung and, alongside economic reforms and a focus on technology, boosted the country’s growth.

“China grew when it abandoned state leadership and a strong interventionist bias and began to free the markets. This intensified in the 1990s and 2000s, when international private capital, alongside public capital, also began to finance China’s development, which opened up to the world”, explained economist Fernando Ulrich, from Liberta Investimentos, on his YouTube channel.

Comparison with USA is fallacious

The comparison with the incentives that have been given to technology sectors in the US is, to say the least, inadequate, according to economists interviewed by People’s Gazette. The thesis does not take into account fiscal and tax realities, the business environment of the countries and, above all, the qualification and productivity levels of companies.

“There is a huge lack of understanding on this topic. In fact, these countries have directed credit to certain sectors, but they are resources for very competitive industries globally. And they have become competitive due to a set of other more relevant macroeconomic factors, including the huge advance in education, which was reflected in a very qualified workforce”, says economist Aod Cunha, from the Millenium Institute.

“These countries have already done their homework, they have a different business environment, a high rate of domestic savings and favorable conditions to be able to choose some sectors and carry out innovation”, he continues.

Cláudio Considera, coordinator of the National Accounts Center at the Brazilian Institute of Economics (Ibre/FGV), classifies the comparison made by members of the government as fallacious.

“Firstly, there are no institutionalized policies in these countries. But, mainly, in none of them there is a requirement for local content, which promotes the inefficiency of companies due to the lack of competition with the external market”, says the economist, remembering that the Lula government’s program provides priority for national purchases in government purchases and infrastructure projects, even at higher prices, as a way of boosting the industry.

For Ulrich, despite having recently adopted incentive policies for certain sectors, the USA has an institutional environment that will continue to attract investments from around the world. “The country grew, became rich and consolidated itself as the largest economy in the world thanks to structural factors and economic freedom. It will continue to grow despite interventionist policies and not because of them”, he states.

Cesar Mattos, professor at the University of Brasília (UnB) and Fundação Getúlio Vargas (FGV-DF), highlights that the government has mistakenly used an IMF report to validate the wave of new industrial policies in the world. “Public purchasing mechanisms, margin of preference and local content are important inducers of industrial development and are widely used throughout the world, in all industrial policies. A recent report (now published in January 2024) from the IMF shows precisely this : the return of industrial policies with strong incentives from countries, including the public purchasing mechanism”, states the government in a list of “Facts and Fakes” published on the official website.

According to Mattos, it is exactly the opposite. “The report admits the wave of new industrial policies around the world. But in addition to the negative consequences for the country that adopts the new industrial policies, the IMF warns of negative spillovers to other countries and the entire international trade system based on the Organization World Trade Organization (WTO). In this context, it points out that the current rules to defend against protectionism in the world will need to be updated to avoid bad impacts on global well-being. Definitely, seeking this text from the IMF to support the NIB is a fake news“, he states.

Industrial policy divides economists

The debate about the need to adopt some type of industrial policy is a recurring theme, especially when we want to quickly boost growth. This is what the Lula government intends, paying attention to market projections that point to a slowdown in the Gross Domestic Product (GDP) this year.

Economists are divided between those who defend the use of horizontal policies, that is, for the entire industry, and those who advocate initiatives aimed at specific segments. Normally, dirigiste economists tend to choose so-called strategic areas, while the liberal perspective argues that stimuli, if any, should be linear.

In Brazil, there have been countless times when attempts have been made to direct industrial production, increasing the participation of sectors supposedly generating greater economic growth. For a long time, mainly between the 1950s and 1980s, the effort was reduced to the imposition of protectionist tariffs, such as import taxes, product nationalization rates and preference in government purchases, in addition to subsidies and exchange rate policies to promote exports.

Cunha compares the initiatives. “[A NIB] It is an idea of ​​growth similar to that of the late 1970s with the second PND [Plano Nacional de Desenvolvimento, desenvolvido na ditadura militar, com foco em substituição de importações e aumento de exportações de bens de capital]. This deal clearly didn’t work. Brazil had a huge debt crisis,” he highlights.

After the 1980s, which became known as the “lost decade” due to low growth, there were occasional attempts that also proved to be disastrous. One of the examples was the IT law, which sought to protect the nascent national industry but ended up delaying innovations. “We were left with a national industry that was scrapped for a long time and then we were able to deal with it”, says Cunha.

The commercial opening promoted abruptly by the Fernando Collor de Mello government in the 1990s was not enough to promote the competitiveness of the industry. From the 2000s onwards, initiatives involving subsidized credit were repeated without any generation of sustainable development of the national industry.

On the contrary, the formula repeated over and over resulted in fiscal disarray, inflation and an increase in interest rates. “The most recent example was the policy of national champions, under the Dilma Rousseff (PT) government, which contributed to the 2016 recession, the biggest in decades”, says the Millenium economist.

Industry development requires competitiveness

The government has defended that the New Brazil Policy will be horizontal, that is, for all interested sectors, and that the resources will not come from the Treasury Budget, preserving the fiscal aspect. Even so, economists consider its essential principle of directing credit via BNDES insufficient to boost the industry.

For Cláudio Considera, the policies that worked in the country never did without innovation and planning. He cites the successful cases of the Brazilian Agricultural Research Company, Embrapa, a milestone in agricultural development and technology; from Embraer, a national company that became one of the largest commercial jet companies in the world; and Petrobras, which is today the world leader in deep-sea oil exploration.

“All projects included transfers to resources for investment in technology and innovation, linked to universities and research centers”, he says.

In Cunha’s understanding, the classic external examples of industrialization, from South Korea and Japan, demonstrate the need for structural reforms, especially in education and qualification.

“There is a lot of talk about Asians too, but South Korea, for example, promoted an educational revolution. It invested significantly in the quality of basic and advanced education, aimed at training the workforce and competitiveness of the industry”, he says.

“If we want to have competitive companies, we need to have competitive human capital. Productivity will rise when there are more qualified workers. And this qualification has to come from below, it has to come from basic education”, he assesses.

In Brazil, the majority of education resources are spent on higher education. According to data from the report Education at a Glance 2023, from the Organization for Economic Cooperation and Development (OECD), the Brazilian government invests US$14,735 annually per university student, practically the same as the group average, which is US$14,839. In basic education, however, Brazilian investment is US$3,583 per student per year, just a third of the OECD average (US$10,949). In terms of basic education, Brazil is the third worst in the ranking of 50 countries prepared by the organization.

“It is a conceptual error to think that we will carry out reindustrialization or expand the participation of industry due to short-term decisions by the State, directing credit, and leaving aside an agenda that is known and that explains the success of other countries, which is increase productivity, improve the business environment and undergo a series of reforms. It is not simply the government pointing to the credit button and giving more cheap money”, says Aod Cunha. “With this plan, the government will, at most, give additional breathing space to the industry and promote a chicken flight.”