Lula government promises “neo-industrialization” but recycles old ideas

The main Brazilian industrial entities, including the National Confederation of Industry (CNI) and the Federation of Industries of São Paulo (Fiesp), presented a series of suggestions during the 2022 election campaign, in part accepted in a document released by the then candidate Luiz Inácio Lula da Silva (PT) days before the second round.

The reindustrialization of the country was one of the central points of the document, which advocated taking Brazilian industry into the 21st century. For this, an industrial policy focused on innovation, stimulating public-private cooperation, strengthening science and technology and ensuring access to affordable finance.

After seven months in office, however, little progress has been made in industrial policy, experts point out. What is being seen so far, as well as in the social area, is the recycling of old ideas, such as the strengthening of the National Bank for Economic and Social Development (BNDES), the program that resulted in incentives for the purchase of cars, benefiting the automobile industry, and incentives for the shipbuilding industry, based on the requirement of local content.

Another measure that can be taken, according to the vice-president and Minister of Development, Geraldo Alckmin (PSB), is the provision of BNDES resources at below-market interest rates for innovation and the digitalization of companies.

At the development bank, the view is that reindustrialization – or “neo-industrialization”, a term touted by the government – ​​is the only development alternative for Brazil.

This is what José Luís Gordon and Alexandre Abreu, directors of the bank, maintain. In an article in “Folha de S. Paulo”, they argue that agriculture and services have low technological density and do not generate sustained growth. They claim that all countries protect their manufactures, and that Brazil should do the same.

The picture, however, is more complex. The manufacturing industry has been losing space in the GDP. A study carried out by researchers Claudio Considera and Juliana Trece, from the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre/FGV) shows that in 1985 the sector represented 36% of the Brazilian GDP. In 2023, the share is only 11%, according to the most recent data.

The fact is that the industry cannot keep pace with other sectors. According to the Brazilian Institute of Geography and Statistics (IBGE), in the last ten years industrial production has shrunk on six occasions. In the accumulated of 2013 and 2022, the sector’s activity decreased by 14.25%. In the same period, commerce grew 5.45% and the provision of services, 6.23%.

Government incentives do not align with other policies

Claudio Shikida, a professor at Ibmec Belo Horizonte and a specialist at the Millenium Institute, points out that the incentives given to industry by the government so far do not align with the government’s environmentalist discourse.

“Do we want more popular cars based on fossil fuels? Do we want to produce very expensive electric cars? It does not seem to me to be the best public policy option. Was there an impact study of this proposal? I mean, a serious study, done under solid scientific methodology? It does not seem to me that a public policy analysis of this proposal has been carried out”, he says, regarding the rescue package for automakers implemented months ago.

According to him, there is no harm in wanting an economically strong industrial sector. “On the other hand, it is unrealistic to want to artificially generate an industrial sector with a high share of GDP. The world has changed, societies change,” he says.

Policies must be horizontal, benefiting all sectors

Pedro Cavalcanti Ferreira and Renato Fragelli Cardoso, professors at the Brazilian School of Economics and Finance (EPGE/FGV), advocate the adoption of horizontal policies that benefit all sectors by improving the business environment and reducing distortions in resource allocation – such as the consumption tax reform, through the implementation of the dual Value Added Tax (VAT).

“These [políticas horizontais] would be complemented by innovation, technological and educational policies focused on increasing productivity, which recognize that innovations in services have been the engine of growth in advanced economies”, they say in an article in the newspaper “O Globo”.

Arminio Fraga, former president of the Central Bank, sees the government’s intention to implement in Brazil, once again, part of an Asian model that worked thanks to high investment and savings and successes in education and production for export. Which is very far from the Brazilian reality.

“A strategy that depends on a high savings rate and little social protection is clearly not for us”, pointed out Fraga in an article in the newspaper “O Estado de S. Paulo”.

Professor Rogério Furquim Werneck sees a certain fascination with a restorationist agenda, driven by the insistence on policies that have proven wrong in the past – such as the construction of refineries, development of the naval industry, severe requirements for local content, subsidized credit programs and fixation on the idea to “reindustrialize” the country at any cost.

In an article in “Globo”, he also mentions that there is a crusade to dismantle everything that is remotely associated with the Temer and Bolsonaro governments. This is the case of the spending ceiling, the State-Owned Companies Law, labor reform, secondary education reform, the Sanitation Framework, the independent Central Bank and the privatization of Eletrobras.

Shikida points out that industry, like any other sector of the economy, responds better to supply and demand stimuli than to government demands.

Task size is too big for a single government

Consider and Trece consider that the discussion about reindustrialization is rhetorical. They consider that a recovery of the Brazilian industry will be an arduous and long-lasting task – and not something to be solved by a single government.

“It will require continued measures from several governments to regain a relevant role in the economy. It will be necessary to acquire modern technology to increase its international competitiveness and, together with universities, innovate and improve the acquired technology”, they say.

The role of the government, however, needs to be differentiated, point out the researchers. It should not be like in the past, with protective tariffs for nascent industries, nor with subsidies for elected sectors, as happened more recently.

“The government should act by means of incentives to the means that allow the industry to become efficient and competitive. One example is the stimulus for the emergence of specialists from universities. Petrobras’ strong interaction with universities made it possible for it to become a leader in new oil exploration technologies”, they point out.

Another example cited by them is agribusiness, which benefited from investments in research, technology and innovation initiated by the Brazilian Agricultural Research Corporation (Embrapa) in the 1970s.

This is not what is being done at the moment, points out Rubens Moura, professor of economics at Faculdade Presbiteriana Mackenzie Rio. He points out that the government lacks coordination, which inhibits technological development: “The market does not believe in academia, the government does not bridge the gap between the market and research centers, and the government does not finance them”.

Brazilian industry was protected; successful countries opened up to the world

The chief economist at MB Associados, Sergio Vale, points out that the Brazilian industry grew protected and closed, benefiting from high import tariffs. “The countries that grew industrially were those that made trade agreements, reduced protection and opened themselves up to competition.” This is the case of countries like South Korea, Singapore, Malaysia, Poland and Taiwan.

Marcos Mendes, associate professor at Insper, points out that nations prosper that manage to overcome adverse conditions and take advantage of favorable ones.

“The important thing is that people are educated, with the ability to innovate or use innovative methods; that opportunities for value creation, innovation and technology absorption via international trade are explored; that the government does its part in the provision of public goods and does not interfere excessively, preventing the efficient absorption of capital”, defends Mendes in a text in “Folha de S.Paulo”.