Incentive to the automotive industry holds Brazil in the past – 05/25/2023 – Market

In recent years, the United States, Europe and China have implemented trade and industrial policies with a strong interventionist bias. Stimuli to specific sectors, via subsidies, tax exemptions and local content rules, have been increasing. The Brazilian government apparently does not want to “be left behind”.

Today measures were announced in exactly that direction. Special mention should be made of fiscal incentives for the automobile sector and subsidized interest rates, via the BNDES, for industrial innovation. There are strong indications that this is just the beginning of a “reindustrialization package”.

If the main world powers are doing active industrial policy, we should do the same, right? Wrong. History, Brazilian and international, teaches us that these policies have questionable effectiveness and impose a high cost on society. Furthermore, the Brazilian context is quite different from the American or Chinese context.

Why are the great powers moving towards increasing interventionism? The main motivations are of three types: geopolitics, climate and clientelist. For Brazil, it makes no sense to get involved in current geopolitical disputes. The climate issue is everyone’s responsibility, but the announced measures, such as the one in the automobile sector, go in the opposite direction.

The other motivation is clientelism, which favors specific groups. It exists all over the world. In the Brazilian case, the sectors benefited by the recent decisions will really expand, increasing jobs, profits and sector wages. That’s the easy part. The problem is that this will come at the expense of the rest of society. After all, subsidies and tax breaks don’t fall from the sky; on the contrary, they are funded by everyone who is not benefited by the measures.

There are two more sophisticated arguments that could justify the effort to “reindustrialize” the country. One is that some sectors are essential to the functioning of the economy, and that the imminence of a generalized trade war, as in the 1930s, would justify self-sufficiency in such sectors. The problem is that this is not, at least so far, the situation in international trade. In addition, it is very difficult to argue that sectors such as automobiles are essential for the economy.

The other argument is that there are strategic sectors that generate increased productivity for the rest of the economy. If entrepreneurs are not rewarded for this effect, they will invest below what is desired for society. There is no doubt that this happens, to different degrees, in some sectors. The difficulty is identifying these sectors and, above all, correctly implementing policies that correct this inefficiency. A recent study shows that even “smart” and benevolent governments would have difficulties in generating significant results. And as policy makers usually do not have such characteristics, the international experience is full of failures.

The Brazilian experience is even richer (or poorer, to be more precise). Specifically for the automotive sector, one of the most benefited in the last 70 years, the retrospect is disappointing to say the least. In a recent book, we analyzed Inovar-Auto, the last major program for the sector, implemented just over ten years ago. In addition to violating World Trade Organization rules, there is no evidence that the program has had a noticeable impact on productivity in the sector. At the same time, it generated distortions in the rest of the economy.

In short, the measures to reindustrialize the Brazilian economy sound like a shot in the foot of Brazilian society. An unfortunate return to the past.