Subsidies and industry protection are mistakes – 06/16/2023 – Marcos Mendes

BNDES directors published in this Sheet, on June 8, the article “The BNDES at the center of neo-industrialization”. They argue that: (1) the only path to development is through manufacturing; (2) in Brazil, agriculture and services have low technological density, not being able to generate sustained growth; (3) every country protects its manufactures, we must too, so as not to be left behind.

In the book “How the world became rich: the historical origins of economic growth”, Mark Koyama and Jared Rubin make an extensive review of theories about what allows a country to achieve high income. In doing so, they show more varied paths than the single recipe for “industrialization” via protection of national manufacturing.

The book points out that success comes from the combination of different institutional factors (such as freedom of trade, good business environment, good public services), culture (for example: appreciation of education and trust in third parties), geography (such as transport facilities, size of the domestic market) and “scars” from the colonial heritage, which often create institutions and culture that are detrimental to development.

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 by impeding the efficient allocation of capital.

It is worth quoting the authors (in free translation): “It is a mistake to assume that only way for a country to become rich is through industrialization. While this has happened in Great Britain, the United States and Germany, there have also been countries that got rich without industrialising. Among them are Denmark, the Netherlands, Australia and New Zealand. They were able to specialize in commercial food production or processing, usually for export markets. This required international markets and some degree of globalization. (…) [e] involved the application of scientific ideas, but to food production, not manufacturing” (p. 189, italics in original).

Our agriculture has followed this path: a lot of research and innovation, competitive insertion in the international market and access to imported technologies and inputs. Productivity grows at a much higher pace than other sectors. Our few successful manufacturing companies, such as Embraer, Natura or Weg, follow the same recipe: internationalization and access to imported inputs and technologies.

As institutional, educational and infrastructure conditions are created, new companies in different sectors will gain productivity and the economy will diversify and grow more.

Defenders of state protection for national manufactures point to the case of the Asian tigers as an example of success. South Korean conglomerates (chaebols) and their state benefits are always remembered. Koyama and Rubin argue that the “success of South Korean industrialization [ocorreu] despite of the strong role played by the State” (p. 210, emphasis in italics in the original), not because of it: “the South Korean economy was subjected to the discipline imposed by the international market (…) the success of the chaebols depended, in ultimately on its ability to enter export markets. (…)” (p. 210).

In direct comparison to our picks, they claim, “East Asian economies were all relatively small. They were forced to rely on international markets. They escaped the trap many large developing countries fell into, relying on protective tariffs and subsidies to support domestic manufactures. (…) [que] seemed plausible in countries with large domestic markets such as Brazil and India. Such policies (…) often freed domestic manufacturers from the threat of international competition and encouraged rent seeking and corruption” (p. 209).

It is in this failed protectionist model that the BNDES wants to insist. Although it calls it “neo-industrialization”, it does not explain what “neo” is. The recipe is the same as always: protection and subsidies for the production of goods, choosing winners. A “neonarrative”, which adorns an old thing with a new name.

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