Forty years of deindustrialization


By Luiz Carlos Bresser-Pereira*

The Brazilian economy, which grew remarkably between 1950 and 1980, has been almost stagnant ever since. While growing at 4,5 percent a year in that period, it has since grown by just 0,9 percent a year. The same semi-stagnation can be observed when we compare growth in the same period with other developing countries, which was 3,0 percent, and that of rich countries, 1,7 percent per year. In addition to failing to catch up, Brazil is lagging behind less developed countries.

In 1980, still within the framework of a developmentalist economic policy regime, the Brazilian economy came to a halt, victimized by a major financial crisis – the External Debt Crisis – which resulted from the mistaken strategy of the Geisel government of trying to grow with foreign savings, that is, with deficits in current account. As, since 1964, the military regime had indexed the Brazilian economy, the financial crisis turned into high inertial inflation, and economic development was paralyzed.

In 1990, with liberalizations, deregulations and privatizations, Brazil, which had been so successful with the developmentalist regime, bowed to external pressure and adopted a liberal economic policy regime. At the same time, in 1993, it signed the Brady agreement, which ended the debt crisis, and, in 1994, it stabilized prices with the Real Plan. But economic development, which should then have been resumed, did not happen, because the liberal economic policy regime is incompatible with Brazilian economic development.

Within the framework of economic liberalism, industrialization ceased to be a priority for both liberals and left-wing economists. The former bet their chips on neoliberal reforms and on the macroeconomic tripod, and guaranteed for the new dominant coalition – financial-rentier – the high interest rates and low inflation that rentier capitalists and financiers demanded; the latter accepted the new economic policy regime, assumed that this regime would lead to economic development as long as it was complemented by industrial policy, and concentrated on the task of reducing inequality – on promoting an increase in the minimum wage and income transfers to the poor. poorer.

Low growth is directly related to the deindustrialization that has been taking place since the 1980s. In that decade, as we can see in the graph borrowed from Paulo Morceiro, the participation of the manufacturing industry in GDP was around 26 percent against miserable 11 percent in 2018.

We can see in the graph that deindustrialization occurred in two waves. One from 1986 to 1999, the other since 2004. Deindustrialization began in the 1980s, when the country faced the severe Foreign Debt Crisis, which hit much of the underdeveloped world. It had as a direct consequence, already in the early 1980s, the drop in public savings, which hovered around 6 percent of GDP in the previous decade, to a negative rate of 2 percent. State companies, which were responsible for an important part of this savings, ceased to play this role, firstly because their prices were used to control inflation, and secondly because they were privatized.

Despite the high inertial inflation being controlled in 1994 (high inflation triggered by the external crisis added to the indexation of the Brazilian economy since 1964) , the quasi-stagnation continued in the 1990s because trade and financial openness made the exchange rate overvalued for the industry in the long term due to two causes: the increase in real interest rates attracting capital and the dismantling of the mechanism that neutralized the Dutch disease.

The beginning of the second wave of deindustrialization in 2004 is apparently contradictory, because the period between 2005 and 2010 was the only period, since 1980, in which the growth rates of Brazilian industry were satisfactory. It becomes, however, understandable if we consider that this growth was caused by the boom in commodities that resulted from the new and great demand from China. The increase in prices has exacerbated the Dutch disease in the country, because exports of soybeans, iron ore, etc. became profitable at an exchange rate that was even more appreciated than the one that usually prevails when commodity prices are “normal”.

Deindustrialization meant quasi-stagnation. There is a direct causal relationship between the two variables. Economic development is an increase in per capita income, which is equal to an increase in productivity per worker as long as the labor force-population ratio is constant. The increase in productivity, in turn, occurs in developing countries mainly through the transfer of labor from activities with low added value to activities with high added value per capita, in practice, from agriculture and livestock to industry.

With the abandonment, from 1990, of the developmentalist economic policy regime in favor of a liberal regime, we hear again the thesis that the economic history of countries proves to be invariably wrong, but is dear to liberals. The important thing would not be for the country to industrialize, but to take advantage of its comparative advantages. Because, as Gabriel Palma says, between indignation and scathing, “it makes no difference whether the country produces micro ships ou potato ships. "

In Brazil, these ideas were dominant until the mid-1950s. Liberals used to say, then, to criticize Getúlio Vargas' industrialization policy: “Brazil is an essentially agricultural country”. However, the success of the developmental strategy of industrialization was so great between 1930 and 1960 that, since the mid-1950s, no one had the courage to repeat this nonsense.

When, in 1990, the commercial opening took place and, soon after, the financial one, this did not change. Deindustrialization took place, but without the government having this explicit objective. Since 2015, however, after an unsuccessful first Dilma Rousseff government (2011-2014), the economic elites have united under the aegis of the financial-rentier coalition, the neoliberal ideological hegemony imported from abroad has become very strong, the law of comparative advantages of international trade was revived, and the idea of ​​industrialization was abandoned.

Investment and Interest/GDP 1971-1980 2011-2017
private investment 17,6% 17,5%
public investment 7,8% 3,2%
Total 25,8% 20,7%
Interest paid by the State 1,5% 8,2%

Increased productivity or economic development depends on many things, but it mainly depends on private investment and public investment. Brazil grew and industrialized between the 1930s and 1970s because the State and its companies invested heavily. As we can see in the table comparing the 1970s and the 2010s, while the ratio of private investment to GDP remained around 17,5 percent, public investment fell by half: from 7,8 to 3,2. XNUMX percent of GDP.

The State invested because it realized positive public savings and its companies were profitable; the private sector invested because investments by the State and its companies represented demand, because the interest rate was low or negative, because a system of import tariffs and export subsidies on manufactured goods kept the real exchange rate competitive and stimulated companies industries to invest.

Since the 1980s, when what I called the “state fiscal crisis” broke out, public investment has fallen. In the 2000s, there was a great effort by the government to increase it, but with the recession that began in 2014 and the fiscal crisis that then materialized, the government, from 2015 onwards, began to adopt a superorthodox pro-cyclical policy that led to investment public to fall to around 1% of GDP. As a result, the economy is expected to grow by a maximum of 1% in 2019, and GDP will only reach the 2014 level in ten years, against an average recovery in previous seven-quarter recessions.

Why has public investment fallen so much? As we have already seen, since the beginning of the 1980s, public savings have been transformed into public dissavings: the State began to have current or consumption expenditures higher than its revenues. This initially happened because large companies had to be bailed out by the State in the context of the External Debt Crisis; second, because many state-owned companies that made profits were privatized; and, finally, because two expenses increased a lot: a necessary expense (the social one, in education and health), and another, absurd one, the interest paid by the State. The bloodletting caused by these expenditures for the benefit of rentiers and financiers has been enormous. As can be seen in the table above, government spending on interest increased from 1,5 to 8,2 percent of GDP.

Why has private investment held up, instead of increasing, as it should have since many large, profitable companies have been privatized? Basically, because, from the 1990s onwards, the Brazilian economy fell into the macroeconomic trap of high interest rates and an appreciated exchange rate in the long term, which discouraged private investment by making many companies that were competitive in the economic sphere non-competitive in the economic sphere. administrative and technological plan.

In other words, because, even though it has dropped since the abusive level of 1994, it has remained and continues to this day at high average levels. There are many reasons for this, but the main ones are: because there is a “two-way” public debt contagion effect between the bank reserve market and the public bond market; because the political power of the financial-rentier class coalition is very large in Brazil; and because Brazilians continue to believe that they can incur current account deficits to try to grow with foreign savings – a mistake, because capital inflows attracted by high interest rates to finance the deficit in current accounts increase the supply of dollars and appreciate the real in the long term, stimulating consumption instead of stimulating investment.

The high interest rate and the policy of growth with foreign savings were, therefore, the first reason why the exchange rate remained overvalued; the second cause was the commercial and financial liberalization that dismantled the Dutch disease neutralization mechanism. This neutralization was based on high customs tariffs, which neutralized the Dutch disease in relation to the domestic market, and subsidies to exports of manufactured goods, which neutralized it in relation to the external sector.

An appreciated exchange rate in the long term discourages investment because, under these conditions, well-managed companies with up-to-date technology lose competitiveness and do not invest, even if demand is satisfactory – both external demand and internal demand. A high interest rate, in addition to causing exchange rate appreciation, directly discourages investment and deprives the State of its ability to invest.

What are the interests behind the high interest rate and the appreciated exchange rate? The explanation of political economy can be summarized in one sentence: workers, rentier capitalists and high public bureaucracy are concerned only with their immediate consumption: workers prioritize the increase in wages and see in the expansion of public expenditure the path to development ; rentiers, represented by liberal orthodoxy, are highly interested in high interest rates and justify them with the specter of inflation; the high corporatist public bureaucracy, which legitimizes itself through the fight against corruption, ignores the problem of development. In other words, in these 40 years Brazil has been dominated by fiscal populism (deficits public) of the first group, by exchange rate populism (growth with “foreign savings” or deficits current account) of the second, and the corporatism of the third.

In order to grow again, Brazil needs to lower the interest rate and keep the exchange rate competitive. It needs to solve the fiscal crisis, for this purpose carrying out a countercyclical policy of increasing public investment, even if this, in the very short term, increases the deficit public. Need to reduce interest expense. It needs to recover the State's saving and investment capacity. It needs to return to the primary surplus. It needs to adopt an exchange rate policy that keeps the exchange rate floating around competitive equilibrium. It needs to stop trying to attract capital that only replaces domestic savings with foreign savings. Need to neutralize the Dutch disease. It needs to reach a small current account surplus, necessary for the exchange rate to be competitive and for companies to invest again.

*Luiz Carlos Bresser Pereira He is a professor at the Getúlio Vargas Foundation – SP.

Article originally published in Economist's Journal, in May 2019

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