Note on the reindustrialization of Brazil

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By MARLON DE SOUZA*

The Brazil resulting from the policies of the Michel Temer and Jair Bolsonaro governments was reconverted into a primary (agro-ore) exporting country

Advanced studies of world political economy prove that there is no country in the world that has reached the stage of development and the status of economic power without having highly industrialized. Industry has the production with the highest added value, it is the sector that employs the most qualified workers and for this reason pays a higher average salary, it is where more jobs are generated per firm.

In addition, the importance of industry for economic development resides in the fact that it is the industrial productive sector that mobilizes and forms a large productive grouping of suppliers (medium and small companies) around its manufacturing plants. Contrary to what some press bodies erroneously announce in an editorial, the world's largest economic power, the USA, is today in a process of reindustrialization, the second largest economy in the world, the People's Republic of China is the industrial engine of the planet, with an industry diversified from heavy steel, automotive to high-performance artificial intelligence.

Contemporary economic sciences prove that the path to overcoming underdevelopment is industrialization.

The Brazil resulting from the policies of the Michel Temer and Jair Bolsonaro governments – against the global trend – was reconverted into a primary (agro-ore) exporting country.

Professor of economics at the Federal University of Rio de Janeiro (UFRJ) and economic affairs officer at the Commission for Latin America and the Caribbean (ECLAC) Ricardo Bielschowsky explains that “there is no way to achieve efficient industrialization through spontaneous market forces, for this reason it is necessary that the State plan it”.

According to former Minister of Development, Industry and Foreign Trade (MDIC), post doctor at the University of Illinois and the University of Paris in economics Mauro Borges and who was part of the Transition Cabinet, the central diagnosis is that in the Bolsonaro government there was effectively an intentional dismantling of Brazil's industrial and foreign trade policy.

Mauro Borges presents several indicators to demonstrate the decomposition of industrial policy: (a) violations of anti-dumping policies – which are the use of norms defined by the World Trade Organization (WTO) against unfair practices by foreign competitors in relation to Brazilian producers. (trade defense policies, which cannot be confused with protectionism); (b) complete decapitalization of the main Brazilian bank in terms of investment financing, which is the National Bank for Economic and Social Development (BNDES). The BNDES currently has a disbursement allocation of 0,74% of the Gross Domestic Product (GDP), which is the lowest percentage allocation since the creation of the BNDES in 1952; (c) Brazil's infrastructure is below the depreciation replacement level.

 

BNDES

Former MDIC Minister Mauro Borges shows that the Jair Bolsonaro government adopted a deliberate policy to decapitalize the BNDES. The BNDES, which once had a disbursement capacity greater than the World Bank and which was the main development bank in Latin America, is now undercapitalized.

Em Efficiency, Finance and Varieties was Industrial Policy A book organized by Nobel Prize in Economics and professor of Economics at Columbia University Joseph Stiglitz in partnership with economist Akbar Noman finds that public banks are imperative for industrialization based on long-term adequate cost financing for industrial companies. For comparison purposes, the BNDES has already represented an annual disbursement of 1,25% in relation to GDP for investment in infrastructure – which was a historically standard percentage disbursement for investment in infrastructure. Today, BNDES disbursements for annual infrastructure investment are 0,25% of GDP and this is because it is residual, a series of investments that are usually long-term and were contracted during the Lula administrations. This disbursement percentage can be verified even lower if only the disbursements contracted from the Bolsonaro government are considered.

The BNDES' deliberate decapitalization policy is also evident in the sales operations of the efficient results it had in the purchase of shares and the launch of companies. BNDES today is a limited financial institution, a bank without financing capacity, without boosting the industry, without attention to small and micro companies.

Mauro Borges explains that “all BNDES profits are converted into dividends. If the bank is a development bank, it should strictly follow the limit established by the CVM, which is a 25% distribution of profits and retain these profits for additional investments. And these additional investments will generate much more cash for the Treasury because it makes the economy grow. If the economy stagnates there is no way to make the country grow”.

The already announced new president of the BNDES, economist Aloizio Mercadante, reports that “the BNDES had a profit increase of 2022% until the third quarter of 30, R$ 34 billion in profit increase. But this profitability, instead of being transformed into financing, growth, investment, development, is all transferred to the National Treasury. The BNDES transferred the entire R$45 billion and now from the dividends it will receive it will transfer another R$24 billion, of which R$19 billion has already been transferred”.

The results certify that the BNDES is a fully viable public investment financing institution. The BNDES currently has a very low default rate. In up to 90 days, delinquency is at 0,1%, which is a very low delinquency rate for the banking system. According to the Basel Accord – which are basic liquidity and responsibility parameters for the entire market to minimize the risk of credit operations and ensure the stability of the financial system in general – the BNDES is excessively prudent at around 36% and the threshold is 20%.

Mercadante explains that “the BNDES is a bank that has room to increase its funding – ability to raise capital to offer specific investment financing to increase industrial production – without any tax cost, without any need for transfers of National Treasury resources because the BNDES has the capacity to recompose itself if given the necessary instruments of recomposition of funding”.

The Transition Cabinet points this as one of the challenges of the Lula Government, to recompose the funding from BNDES. A device studied by the Transition Cabinet would be to resume the funding raised from the Worker Support Fund (FAT) through the allocation of the percentage of 40% of the Social Integration Program and the Civil Servant Asset Formation Program (PIS/PASEP) that was destined to funding from BNDES. This percentage with the Social Security Reform was reduced to 25% – this means taking investment out of the country. The resumption of funding from the FAT is a necessary measure.

The fear of the financial market is that the BNDES will resume the Long Term Interest Rate (TJLP) which was subsidized by the National Treasury and which was replaced by the current Long Term Rate (TLP) in the government Michel Temer. According to members of the Transition Cabinet, any change in this sense "will be preceded by in-depth technical discussion and only Congress has the power to promote changes to the TLP through the approval of a law".

From a pragmatic point of view for Brazil's industrial policy, the TLP reform is a fundamental reform to make long-term investment financing viable. The TLP as it is today varies between 15% and 16%, which is an unfeasible rate for investments in the country. In investments over 10 years, the rate of return does not allow the cost of credit at the TLP level. That is, the TLP is inefficient as a long-term financing instrument in Brazil.

The TLP has to be reformed and made flexible with different rates for the medium and long term. The TLP cost of a 5-year investment cannot be the same rate as a 30-year one. A TLP reducer without additional resources from the Treasury is crucial, for example, for special programs such as climate transition and energy transition.

As Brazil does not have an efficient private investment financing mechanism with medium and long-term credit, another device studied by the Transition Office for the BNDES to increase its credit capacity, mainly for medium and long-term financing, is the formation of a fund guarantor. The concept is that the BNDES would enter reducing the risk and thus attract investment because it has huge international liquidity for a private project. The great comparative advantage is that the BNDES reduces the risk and thus consolidates security for the projects to be executed.

 

Tax reform and fiscal responsibility

The policy of the new Lula government is fiscal responsibility with social justice. There is no dichotomy between fiscal responsibility and social responsibility. What is ineffective is a rigorous economic policy of fiscal responsibility and disregard for social responsibility. If the government is fiscally irresponsible it is clear that this has social impacts. But also if it is fiscally responsible at the expense of the social field, this generates bad fiscal results because the country stops growing, stops generating jobs, reduces industrial productivity, government revenue drops and obviously has an impact on public accounts.

One of the priorities of the Lula government is also Tax Reform, which, although it has not yet been defined, the Transition Cabinet has dedicated itself to studying the most consistent proposals on the agenda. Some general guidelines for tax reform that are almost consensual within the Transitional Cabinet are; the proposed taxation of dividends, fights the regressiveness of the Brazilian tax system, reform of indirect taxes to trigger an increase in productivity.

 

Foreign trade and small businesses

It is necessary to trigger an offensive foreign trade policy to open and expand access to international markets, diversify the destinations of Brazilian exports, promote products and improve the international perception of Brazilian companies.

According to the president of Small Business of the Federation of Commerce, Goods and Services (Fecomércio/SP) and USP professor of Economics of Organizations Paulo Roberto Feldmann, only 1% of Brazilian exports are from small companies. In Italy, which exports more than twice as much as Brazil, small companies account for more than half of exports. Feldmann explains that this participation of small companies in Italian exports is due to the fact that in Italy, through action by the State, a consortium was created that articulates small companies, helping with management methodologies and tax exemptions.

The USP professor also considers that small companies in Brazil do not innovate and points out that this derives from the absence of university extension policies to support the development of innovation in small companies. “In other countries where small companies innovate, there is an intimate relationship of support between universities (public and private) and small companies”, reports Paulo Feldamann.

From the concept exposed above by Paulo Feldmann, it is possible to formulate that the Brazilian State, through foreign trade policies, can have consultancy and assistance with the objective of guiding small companies to define internationalization strategies. The government can also provide training with the objective of increasing competitiveness in the companies for the world market, in addition to the dissemination abroad of economic indicators articulated with the country's positioning through site location attract international investment.

The announced Minister of Finance Fernando Haddad has mentioned on the foreign trade agenda his objective of consummating the agreement announced in 2019 with the European Union (EU). It is the most ambitious treaty in South American countries. If implemented, according to the 2019 balance sheet of the current Ministry of Economy, a free trade area between Mercosur and EU countries would represent an increase in Brazil's GDP of R$ 87,5 billion in 15 years. One of the main reasons why European countries have not rectified the agreement is because of the increase in fires in the Amazon.

 

Conclusion

Investment in capital goods, research, knowledge, science and technology is decisive for inaugurating the trajectory of new development in Brazil, recomposing the inducing and coordinating role of the State and public banks and state-owned companies so that they fulfill, with agility and dynamism, its role in the process of economic development and social, productive and environmental progress in the country.

In the country's reindustrialization process, it is essential to reposition Brazil in Industry 4.0, Artificial Intelligence and global value chains with high value-added products, energy, climate and digital transition, as well as constituting the economic integration of South America, Latin America and Caribbean with the developing countries of the Global South in a sovereign program of the region of respect for the self-determination of peoples, but of mutual, shared and peaceful growth with the US and the European Union.

*Marlon Luiz de Souza, journalist, is a master's student in World Political Economy at UFABC.

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