Wrong agenda in the industry – 05/27/2023 – Samuel Pessôa

In recent decades, there has been a sharp drop in the participation of industry in the Brazilian GDP. From the peak of 34% in 1985 to the current 10%. A significant part of the decline is due to two facts not directly linked to the sector’s performance.

First, given that technological progress is greater in industry, the price of industrial goods relative to the price of services is reduced. The share value will naturally drop.

The second reason is that, in the old series, the size of services was not well measured and, therefore, the country’s total product was underestimated.

Correcting for these two factors, my late FGV colleague Ibre Regis Bonelli showed that the peak in the 1980s was 24%, not 34%. Even so, from the mid-1980s until today, there has been a sharp drop of 14 percentage points in GDP.

Thus, it is worth reflecting on the decline in the participation of industry in GDP, in addition to the factors listed in the previous paragraphs.

A first reason is common to all economies: economic growth reduces the demand for goods relative to the demand for services. In economese, it is said that services have high income elasticity of demand. In the same way that, in the first half of the 20th century, there was a transition from agriculture to industry, in recent decades we have gone through the transition from industry to services.

That is, to a large extent, the decline in the share of industry in GDP is a normal phenomenon shared by countless economies.

However, Asian economies have a much higher share of industry in GDP. Heterodox/developmental economists emphasize industrial policy and the existence of subsidies granted by development banks. There are two factors that our developmental colleagues overlook.

The first is the very high savings rate of Asian economies. There is a direct effect of the high savings rate on industry and an indirect effect. The indirect effect is simpler: high savings leads to lower domestic interest rates and, therefore, lowering the cost of a production factor, capital, which is intensively used by the manufacturing industry.

The direct effect is on the composition of demand. If saving is high, consumption is low. If consumption is low, the country will have an external surplus. Goods are more tradable internationally than services. Those who save a lot export a lot and, consequently, will produce more goods.

The high savings in Asian countries is due to the very low welfare state that prevails there. To get an idea, just look at social security spending. Japan has four times more elderly people, as a proportion of the population, than Brazil, and yet it does not spend more on pensions than we do.

The second factor that developmental economists overlook is that Asians have built extremely high-quality public elementary education systems. There is an abundance of skilled labor.

These two factors —high savings and high quality of workforce qualification— explain much better the high share of industry in GDP than their BNDES.

Around here, the government announces a program to subsidize fossil fuel cars for the middle class. Measure against environmental agendas in cities (air quality and congestion on public roads), energy transition and adjustment of public accounts through reduced tax expenditure (tax exemption), which has been repeatedly denounced by Minister Haddad. We will continue to be at the forefront of backwardness.

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