Brazilian policymakers seem to be making import substitution industrialization (ISI) fashionable again. The dominant economic model between 1950 and 1970 in Brazil and much of the region is often credited with the development of Brazil’s industrial sector—that is, until it fell victim to inefficiencies and to isolation from the more dynamic global market.
Those same risks exist today as Brazil rushes to protect and support domestic industries in certain economic sectors (the so-called strategic development plans) through import barriers and generous public support—at the expense of international competition.
The administration of President Luiz Inácio Lula da Silva first reintroduced the concept of strategic development plans with the launch of the Política Industrial, Tecnológica e de Comércio Exterior (Industrial, Technological and Foreign Trade Policy—PITCE) in November 2003. After 25 years without an official industrial policy, the PITCE was recreated to stimulate innovation in Brazilian companies.
Unlike the development plans of the 1950s and 1970s, the PITCE was based on the concept of “competitive international insertion” of Brazilian industry. It created mechanisms to foster the competitiveness of certain industries and services so that they could then enter the global market. With a focus on innovation and export policies, it preserved the “relative liberalism” and multilateralism in trade policy introduced in the 1990s.
Shortly afterward, the Lula administration expanded the initiative in a policy to stimulate technology and basic industries. In May 2008, it launched the Política de Desenvolvimento Produtivo (PDP, or Production Development Policy). Administered by the Brazilian Development Bank (BNDES in its Portuguese acronym), the PDP seeks to position Brazilian companies, particularly in the mining, steel, aviation, and biofuels sectors, to become global leaders.
This state-led policy was in large part a response to the appreciation of the real. Combined with tax, logistical, bureaucratic, and educational challenges (the so-called “Brazil cost”), the real’s rise relative to international currencies undercut the competitiveness of Brazil’s industrial and service sectors, especially relative to China. The international crisis that hit the markets in 2008 deepened this change.
In her first year in office, President Dilma Rousseff quickened the pace of inward-looking industrial policy. In the wake of the economic crisis, as a number of countries threw up protectionist barriers to trade and Brazil’s currency continued to climb, fear began to mount of Brazilian deindustrialization.
The most pronounced step came in September 2011 when the Brazilian government imposed a 30 percent increase in the IPI (imposto sobre produtos industrializados, or industrialized products tax) for vehicles with less than 65 percent of their value added originating in Brazil, MERCOSUR countries or Mexico. The policy, which is in effect through the end of 2012, disregards World Trade Organization rules and demonstrated a shift in Brazil’s rhetoric away from multilateralism toward its own development agenda. The goal of the temporary IPI increase is to boost the internal market for manufactured goods and promote investment in technology and innovation.
The IPI was the first and most visible shot across the bow of the larger Brasil Maior (Bigger Brazil) policy launched in August 2011, shortly after the largest drop in industrial output since 2008. In the plan, Rousseff announced the government’s intention to apply a series of defensive trade mechanisms (antidumping, safeguards and countervailing measures) to curb the flood of cheap imported goods that came mostly from Asia.
Beyond a more protectionist trade policy, the Rousseff government is also increasing the role of the Brazilian state in the economy, another tool of an industrial development plan. The best indication of the state’s increased activity in picking and promoting winners is the recent activity of the BNDES. Since 2000, its loan disbursements have increased from 23.4 billion reais per year to 168.4 billion reais in 2010. Not coincidentally, the biggest one-year jump in BNDES disbursements (45.1 billion reais) came between 2008 and 2009—the year following the onset of the global economic crisis.
These disbursements have allowed the BNDES to support and prop up national companies. At the same time, state-owned enterprises have recently played a greater role in the Brazilian economy. Their investments have jumped from 1 percent of GDP in 2004 to 2.2 percent in 2010. By 2015, estimates forecast that investments by the government and state enterprises will account for 4 percent of Brazil’s GDP.
With a growing state presence, government procurement becomes extremely important for local industries. To favor Brazilian bidders, the government approved Law 12.349 in 2010, which establishes preference margins of up to 25 percent for domestic suppliers in government procurement, in effect limiting outside competitition.
But the return to ISI is not limited to trade. Similar to decades ago, the Brazilian government, through BNDES and Research and Projects Financing (FINEP in its Portuguese acronym), is actively seeking to appropriate (nationalize) international technology for its own development. The idea is, rather than invest in local efforts at innovation in key industries, to buy technology on the international markets as a way to make the leap into the technology product cycle.
In Brazil, the apparent move toward thinly veiled protectionist policies in trade, industry and technology is occurring at an exceptional time in the world economy. The extent to which some of the more heavy-handed policies—like the IPI—will be continued or are only the first step in a more aggressive ISI-like policy remains to be seen. In the meantime, there is little doubt that the economic crisis and the overvaluation of the currency have triggered greater protectionist tendencies.