Case Studies of Successful and Unsuccessful Industrial Policies: The Case of Brazil David Kupfer (UFRJ and BNDES)

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Case Studies of Successful andUnsuccessful
Industrial PoliciesThe Case of BrazilDavid
KupferFederal University of Rio de Janeiro -
UFRJ and Brazilian National Bank of Development
- BNDES

• New Thinking on Industrial Policy
• International Economic Association (IEA) World
  Bank Roundtable
• May 22-23, 2012
• World Bank Headquarters - Washington, DC

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Brazilian Industrial Policy (BIP)

• Outline
• Introductory Remarks
• 1st BIP - PITCE
• 2nd BIP - PDP
• 3rd BIP - PBM
• Looking Ahead

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Introductory Remarks The Golden Age of
Brazilian Industrial Policy (BIP)

• Up to the 1970s Brazil had a very active, strong
  IP aimed to promote import substitution
• Why STRONG? Because it was able to join the
  crucial three conditions for an IP
• First co-existence with a favorable
  macroeconomic framework
• Second intense use of classical instruments
  (tariff protection, financial incentives via
  BNDES, and fiscal incentives to sectors
  prioritized in 1st and 2nd National Development
  Plans)
• Third (and fundamental) the use of State-Owned
  Companies (some of them have existed since the
  50s, some of them just created in the 70s) as the
  way to solve the typical coordination problems
  of the catching up process
• Results These STRONG IP was successful to
  industrialize the country BUT
• good in structuring new sectors (e.g,
  Petrochemical)
• successes and failures in innovating new
  technologies (e.g.good to aircraft industry, bad
  to computer industry) and
• bad in regulating existing sectors (e.g.,
  Textile, Automobile)

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Introductory Remarks The Golden Age of
Brazilian Industrial Policy (BIP)

• After this, IP was relaxed and progressively
  abandoned first due to macro difficulties in the
  80s and then due to the ideological difficulties
  in the 90s,
• First, the deterioration of the macro framework
• Second, the stabilization model based in fiscal
  contraction
• Third, the privatization process
• Only in years 2000s did the IP return,
• with increasing proeminence but
• still without adequate macro framework, fiscal
  space and effective coordination solution

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Timeline of Recent BIP
Greater Brazil Plan Innovate to compete. compete
to grow
PBM I - II
Productive Development Policy Innovate and invest
to sustain growth
PDP
Industrial, Technological and Trade Policy
PITCE
Lula I
Lula II
Dilma
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Industrial, Technological and Trade Policy -
PITCE 2004-2007
Rationale

• macroeconomic dimension external constraints
• vulnerability of balance of payment, very high
  country sovereign risk, and volatility in the
  exchange rate
• industrial dimension lack of industrial
  competitiveness
• outdated technology in critical sectors such as
  semiconductors, software and capital goods
• innovative dimension windows of opportunity for
  affordable development in the scientific and
  technological systems
• oil and gas, agriculture, pharmaceuticals

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Objectives

• to increase the technological content of domestic
  production
• to promote exports of value-added products
• to make Brazilian companies more pro-active in
  international markets

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Policy Action Points

• Horizontal Measures
• Support to Innovation Activities
• External Trade
• Modernization
• Improvement in the Institutional Environment
• Strategic Choices
• indicate four explicit sectors to focus on
• Semiconductors
• Software
• Capital Goods
• Pharmaceuticals and Medicines
• Innovation Carriers
• Biotechnology
• Nanotechnology
• Biomass /Renewable Energies

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Policy Action Points

• A new legal framework for fostering innovation ,
  comprising the Innovation Act, Lei do Bem, the
  Biosecurity Act and the Biotechnology Development
  Policy
• The creation of the National Council for
  Industrial Development (CNDI) and the Brazilian
  Agency of Industrial Development (ABDI) to
  coordinate the proposed actions and to promote
  dialogue between the public and private sectors
• The improvements regarding intellectual property
  rights , supported by the restructurating of the
  National Institute of Intellectual Property
  (INPI)
• The creation, by the Brazilian Development Bank
  (BNDES) , of specific financing programs, such as
  the Profarma (pharmaceuticals) and the Prosoft
  (software)

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Policy Action Points Main Results
Sectoral Funds for Technology From Intention to
Reality
Budget
Expenditure
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Terms of Trade
PITCE
PITCE
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External Debt and International Reserves
PITCE
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Exchange Rates Brazil, China, Japan and Eurozone
PITCE
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Productive Development Policy PDP2008-2010

• Rationale
• Virtuous circle of inclusive growth from
  external trade to consumption in domestic market
  to fixed investment (the multiplier-accelerator
  dynamic) how to maintain it
• Virtuous circle of labor market restructuration
  from income transfer programs to minimum wage
  increase politic to formalization of jobs how
  to extend it
• Vicious circle of industrial weakening
  regressive specialization, loss of industrial
  chain density, slowdown of productivity, increase
  in technological gap how to revert it

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Investment Rate ( GDP)
PDP
Souce SCN/IBGE
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A structural change in the labor market the
formalization of jobs
Net Creation of Formal Jobs
As part of the process of economic inclusion, the
Brazilian labor market is going through a
significant expansion of formalization of jobs,
without changes in labor laws
Unemployment Rate ()
PDP
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Source IBGE.
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Productive Development Policy PDP - 2008-2011
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PDP The Sectoral Dimension
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PDP Targets
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Structural Patterns of Brazilian External Trade
1989 a 2010
US mil
More Innovative industries
Traditional industries
Agrocommodities
Mineralcommodities
Fonte SECEX, GIC-IE/UFRJ
Source SECEX, GIC-IE/UFRJ
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Greater Brazil Plan PBM2011 - 2014

• 1st stage launched in August 2011
• Almost 40 measures including financial and fiscal
  incentives and new regulations
• New institutions are being created to favour its
  implementation

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Rationale

• Opportunities
• A large and dynamic domestic market able
  to sustain growth even in the context of economic
  crisis in developed countries
• Favorable conditions in commodity markets that
  enable to sustain trade surplus
• Existence of a group of innovative companies
  capable of leading a manufacturing modernization
  process
• Accumulation of scientific competencies with
  potential to develop products and services with
  high technological content
• Abundance of natural resources, technological
  mastery, and entrepreneurial capacity in
  renewable energies and in the oil and gas chains
• Use of public procurement and large sporting
  events to leverage new businesses and technologies

• Challenges
• To strengthen the technological upgrading of the
  Brazilian manufacturing industry
• To deal with the effects of both the currency
  appreciation and the uncertainties of the
  international environment
• To face growing international competition in the
  domestic and international markets
• To accelerate investment in physical
  infrastructure
• To improve basic education and to promote
  professional qualification at technical and
  university levels, particularly
  in engineering-related areas

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Objectives

• To build and strengthen critical competencies in
  the national economy
• To enhance productivity and technology density
  within value chains
• To expand the domestic and external markets of
  Brazilian companies
• To ensure socially inclusive and environmentally
  sustainable growth

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PBM Strategic Objectives
Sustainable Development
Expand Markets
Enhance Value Chains
Strengthen critical competences
Innovate and invest to increase competitiveness,
support growth and improve the quality of life
Improve the quality of goods and services
Provide technology, goods and services markets
for energies
Diversify exports and promote the
internationalization of Brazilian companies
Aggregate value
Foster clean production
Strengthen micro, small and medium-sized companies
Increase share of knowledge intensive sectors in
GDP
Strengthen skills
Expand corporate RD
Increase fixed investment
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Management System
National Industrial Development Council
Higher advisory level

• Management Committee
• PR/Cabinet Affairs, MDIC, MF, MCTI, MP
• Coordination MDIC

Management and decision-making level
Executive Group Coordination MDIC

• Foreign Trade

Sectoral Coordination Units

• Investment

• Executive Committees

Sectoral Competitiveness Councils

• Innovation

• Professional Education
• and Qualification

Systemic Coordination Units

• Sustainable Production

Articulation and formulation level

• Competitiveness of Small Businesses

Regional Industrial Development
Consumer Welfare
Labor relations and working conditions
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Executive Committees and Sectoral Competitiveness
Councils
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Main Actions

• Incentive for Investment and Innovation
• Tax Relief
• Financing for Investment and Innovation
• Legal Framework of Innovation
• Foreign Trade
• Tax Relief on Exports
• Trade Remedies
• Financing and Guarantee for Exports
• Trade Promotion
• Industry and Domestic Market Defense
• Tax Exemption on Payroll
• Special Automotive Regime
• Government Procurement
• Harmonization of Funding Policies

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Targets for 2014 and Indicators

• To increase fixed investment by of GDP
• Target 22.4 x 18.4 (2010)
• To increase corporate spending on RD by of GDP
• Target 0.90 x 0.59 (2010)
• To increase human resource qualification of
  industry workers with at least secondary
  education
• Target 65 X 53.7 (2010)
• To increase value added in manufacturing
  increase the value added/turnover ration
  (VIT/GVP)
• Target 45.3 x 44.3 (2009)
• To increase of knowledge intensive
  manufacturing value added of high-tech
  manufacturing/total
• Target 31.5 x 30.1 (2009)

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Targets for 2014 and Indicators (cont.)

• To strengthen small and medium-sized enterprises
  number of innovative SMEs
• Target 58,000 x 37,100 (2008)
• To promote clean production reduce energy
  consumption per unit of industrial GDP (toe per
  unit of industrial GDP)
• Target 137.0 ton/ R million x 150.7 ton/ R
  million (2010)
• To diversify Brazilian exports by increasing
  share in international trade
• Target 1.6 x 1.36 (2010)
• To develop the national energy markets increase
  the ratio of value added/gross turnover of
  energy-goods manufacturing
• Target 66.0 X 64.0 (2009)
• To increase access to goods and services for
  improving quality of life increase the number of
  urban households with broad band access
   (National Broad Band Plan)
• Target 40 million households x 13.8 million
  (2010)

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PBM 2nd Stage (april, 2012)

• PBM 2nd Stage was based in a new rationale
• The recognition of the worsening of the
  competitiveness gap of Brazilian industry
• The need for a new conceptual target for the IP
  productive system instead of productive chain
• The search for new instruments to strengthen the
  effects of the IP eg, the Automotive Regime
• The urge for new institutions to favour
  public-private collaboration

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Looking Ahead

• Exchange rate-interest rate trap Dutch disease
  (cost) x Brazilian disease (structural
  heterogeneity)
• Regulatory and financing bottlenecks in
  infrastructure investment
• Macro and micro tax burden and the federation
  impasse
• Institutional capacity building, industrial
  policy practices and the big push to
  technological innovation

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Looking Ahead

• Brasil gt Outward
• The China Effect - Brasil in the córner?
• Energy and Food a new primary export-led
• Internationalization of Brazilian firms
• South-american integration and the development of
  regional productive chains
• Opportunities and threats of sustainability agenda

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Looking Ahead

• Brazil gt Inward
• Income distribution and the internal market
  potential
• The triple role of infrastructure demand, supply
  and focus for the National System of Innovation
• The Knowledge Economy as strategic field for the
  embedness of more innovative activities
• Changing from the Competitiveness Imperative to a
  Competence Building economy

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Final Remarks

• About Conception
• social inclusion /mass consumption the drive
  for efficiency increases or decreases the space
  for IP?
• more intangibles and less manufacturing shop
  floors for whom the policy should be addressed?
  
• vertical specialization / industrial
  fragmentation where they are?
• About Policy-Making
• Macro-policies and / or focused policies
• how to combine traditional catching-up with new
  redistributive objectives ?
• The consensus building about the future and the
  essential role of structuring projects
• About Implementation
• top-down x bottom-up? Dont discuss this do both!