Letter to Geraldo Alckmin



Tariffs are still the main instrument of any successful industrial policy

My dear vice-president and minister of Development, I am writing this letter to talk to you about industrial policy and customs tariffs. Yes, customs duties. I read an excellent article today in the magazine Capital letter about the industrial policy project you and your team are about to complete. As his advisers note, it really is a new industrial policy.

New because it is not structured by sectors, but by missions: building sustainable industrial chains, consolidating the health industrial complex, developing infrastructure, promoting digital transformation, developing the bioeconomy, developing strategic technologies. For each mission there will be a working group to take care of the implementation and supervision of industrial policies. Everything seems great to me. I have nothing to add.

I want, however, to discuss the instruments. Interestingly, the expression “industrial policy” only began to be regularly used after the “neoliberal turn” of 1980. Previously, developing countries practiced industrial policy, but did not use that name, but rather import substitution policy.

The major industrial policy instrument that was then used were customs tariffs. Neoliberalism naturally violently criticized the import substitution policy, calling tariffs “protectionist”. They were successful because, from the 1980s onwards, neoliberalism became dominant everywhere and because the import substitution model was already showing signs of relative exhaustion.

What was left for the underdeveloped world, for us, was industrial policy, which was also criticized by the new “truth”, but with less emphasis. Because it was based on tax and credit subsidies that the Empire knew were limited and expensive. Even, therefore, if we used industrial policy, we would not get far.

On the periphery of capitalism, in developing countries, we, developmental economists, sweetly accept the new order of things. We harshly criticized neoliberalism, but we forgot about tariffs, as if they had lost meaning.

My dear Geraldo Alckmin, the tariffs have not lost meaning. They remain or should continue to be the main instrument of any successful industrial policy. I am proposing that you consider them in your industrial policy project.

Would you be suggesting that we return to the import substitution industrialization policy? No, Brazilian industry is no longer an infant industry. It may be so in new sectors, but that does not legitimize us returning to this policy. It was fundamental in the beginning of industrialization, but this phase has now been overcome.

How, then, can we justify returning to using tariffs? The high tariffs we had until 1990 – the year of disastrous trade liberalization – were not only justified by the argument of infant industry (which was no longer applicable), but also by the argument of neutralizing Dutch disease. As this second fact was not considered, trade liberalization triggered a violent process of deindustrialization.

But there is a more general justification. The two previous arguments – that of infant industry and that of neutralizing the Dutch disease – assume that, in the absence of both problems, the international market will guarantee that economic resources will be applied by countries in an optimal way. Now, we know that this is the thesis of neoliberal orthodoxy – which has always proven false when applied.

I am not proposing that we return to the high tariffs adopted during Brazil's period of great development (1950-1980) and even during the crisis of the 1980s. We must, however, use customs tariffs systematically. Use them as an industrial policy instrument alongside subsidies.

But, some may argue, the Brazilian tariff system has problems – especially the fact that we protect inputs more than finished goods. This is true, but it does not follow that we should first carry out tariff reform and then use tariffs as an instrument of industrial policy. Reducing import tariffs on basic inputs involves a difficult and time-consuming process; using customs tariffs within the framework of the new industrial policy is something that can be done immediately.

* Luiz Carlos Bresser-Pereira Professor Emeritus at Fundação Getúlio Vargas (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (Ed. FGV).

Originally published in the newspaper Folha de S. Paul.

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