Industrial policy as an acquired right – 11/18/2023 – Samuel Pessôa

My colleague André Roncaglia, who occupies this space on Fridays, in the last column expressed enthusiasm with the public policy of increasing the import tariff on electric cars to stimulate local production.

There are two necessary but not sufficient conditions for the policy to have any chance of working. First, that it has an end date. Second, it has export targets.

The production of a good is only sustainable if we can reach a much larger market than the Brazilian one. In particular, an automobile production line will only be competitive if production is around 300 thousand units per year.

Due to the diversity of demand, the Brazilian market alone does not support a competitive industry: our market is 3 million units, and the demand is much more diverse than just ten models.

Traditionally, the biggest criticism of industrial policy (IP) efforts is that a bureaucrat cannot pick winners. What will work? It is not possible to know in advance.

However, in a recent work, “The new economics of industrial policy”, Réka Juhász, Nathan Lane and Dani Rodrik recall that the demands on public managers are lower. According to the authors: “In the presence of uncertainty, both about the effectiveness of policies and the location/magnitude of externalities, the ultimate test is not whether governments can pick “winners”, but whether they have (or can develop) the capacity to let the “losers” go.”

In other words, the design of public policy needs to foresee the possibility that the policy will not work. The public sector needs to be able to detach itself from politics.

This is one of the biggest limitations for the practice of IP here. As I wrote in the October 1st column, when we compare ourselves to Asian countries, there are three aspects that make it difficult to employ IP here.

First, we have a shortage of human and physical capital. In general, the sectors that want to be developed intensively use scarce production factors, which makes the policy more expensive.

Second, the Brazilian State has not demonstrated that it has the capacity for built-in autonomy — being close to the private sector, to be able to unlock obstacles, and, at the same time, be independent of private interests.

Third, we have enormous difficulty getting rid of public policies. In Brazil, everything becomes an immediately acquired right. A policy is started and we never get rid of it, even if it didn’t work.

As well remembered by Alex da Mata in a tweet last week, there is a fourth distinction when we compare ourselves to Asian countries. They have always valued openness to international trade, an essential factor for the automobile industry to be self-sustainable.

For example, the payroll tax relief policy was initiated in 2011, during the Dilma government, with the aim of helping sectors of the manufacturing industry compete with China. It was supposed to be a temporary policy until Brazilian industry absorbed the effects of China’s entry into the WTO.

Over time, numerous sectors were incorporated, and today the focus of policy is labor-intensive sectors that produce goods for the domestic market and that do not suffer from external competition, as they are goods that cannot be traded internationally. There is no serious study that shows that the payroll tax relief policy creates jobs.

Payroll tax relief remains a public policy only due to the action of pressure groups that defend localized interests to the detriment of the collective interest. I hope President Lula vetoes the recent renewal of payroll tax relief.

LINK PRESENT: Did you like this text? Subscribers can access five free accesses from any link per day. Just click the blue F below.