Reactions to reindustrialization

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By LAURO MATTEI*

The orthodox reactions to the Lula government's proposals and the critical points of the proposed policy to reindustrialize the country

Introduction

From the world economic crisis of 2008-09, the process of deceleration of the “commodity boom”, through the devaluation of prices, whose apex will occur in the year 2014. This scenario affected the Brazilian economic growth, implying a drop in the surplus country's trade. This fact raised the question of Brazil's insertion in international trade, particularly in terms of the types of goods and products that were being exported. It was in this context that the issue of deindustrialization began to gain greater relevance in academic debates in the country.

Aggregated data from the Brazilian economy since the beginning of the XNUMXst century have revealed a pattern of insertion of the country in foreign trade that could compromise, in the long run, competitiveness and economic dynamism. This is because one of the aspects that stands out is the technological content present in the country's trade flows and its possible effects on the productive structure.

In general, it was observed that this process revealed the existence of a “crisis” in the industrial sector, which became generalized, especially in the traditional branches (sectors more intensive in technology), which have been facing difficulties to compete, both in terms of internal and external market, due to the low degree of technological incorporation. This fact leads to a low competitiveness of the manufacturing industry and causes a loss of dynamism in the economy as a whole, since the lack of gains in industrial productivity prevents a more robust GDP growth.

In this scenario, the country entered a process of primary productive specialization based on the production of agricultural goods and mineral extractive products, concomitantly with a disruption of the secondary sector, given the low capacity for technological development of the industrial sector, especially in the manufacturing sector. The sum of these two factors could have very negative impacts on the economic and social development of the nation as a whole, in the light of other international experiences.

When discussing the trajectory of the deindustrialization process in the world, PALMA (2014) showed that in Latin America it was accentuated after the economic reforms carried out in the 1990s. As a result, the author highlights the existence of four sources responsible for deindustrialization: ( a) an inverted U relationship between industrial employment and income per capita, that is, industrial employment falls when the country obtains a certain level of income per capita; (b) the decline in the relationship between income per capita and industrial employment; (c) changes in income per capita with a drop from US$ 21 in the 1980s to approximately US$ 10 in the 1990s; (c) “Dutch disease”, which usually occurs due to the following reasons: discovery of natural resources; development of export services (tourism, finance, etc.); (d) structural changes in economies.

With this, the author concluded that in Latin America four countries (Brazil, Argentina, Uruguay and Chile) began to present an important process of deindustrialization after the structural reforms of the 1990s, and the main difference between these countries in relation to the countries In Asia, it was the transition process between the import substitution model and economic reforms, and in the case of Latin America there was no combined transition between these reforms and the dynamics of the industrial process. Thus, unlike Latin America – which continues to have low economic connections – Asian economies are highly interconnected through their technological projects and their trade relations, both among themselves and with other countries that have advanced economies.

OREIRO & MARCONI (2014), question the main orthodox theses on deindustrialization and support the idea that Brazilian deindustrialization is not a natural result of the country's development process, but that it presents a precocious character that results from the exchange rate policy adopted in the last years. In this sense, the authors highlight the importance of this phenomenon for the country as a whole, given the significant role still played by the industrial branch in the general economic context.

In addition, they understand that Brazilian deindustrialization stems from the fact that Brazil began to deindustrialize itself with an income level per capita much lower than the income level of developed countries. As a consequence, it should be noted that over the last decade the country's deindustrialization process has been accompanied by a reprimarization of the export basket, with the appreciation of the real exchange rate being one of the main factors that explain the loss of competitiveness of the manufacturing industry Brazilian.

Proposals by the Lula government to reindustrialize the country

In the article “Neoindustrialization for the Brazil we want”, released on the day of the celebration of Industry (25.05.23), president Lula and his vice-president Geraldo Alckmin exposed a set of principles and points that should give rise to a new industrial policy for the country. The initial assumption is that an economy based on knowledge cannot do without a strong and competitive industrial sector. And this, according to the authors, brings the first challenge: to interrupt the deindustrialization process under way in the country through new investment packages in the national industry with the objective of guaranteeing sovereignty in strategic sectors, highlighting the areas of health, communications, energy and defence.

To this end, the document points out that it is necessary to adopt an intelligent industrial policy to meet the challenges of the new times, both in terms of building more resilient production chains and to face the demands of climate change. Therefore, according to the authors, “Brazilian neo-industrialization requires initiative, planning and management”.

In this scenario, there was a wave of public policy that will count on the presence of the main social actors, both in its conception and implementation. As an initial step in this direction, the National Council for Industrial Development (CNDI) was reactivated, which will have the function, together with the Federal Government and other institutions, to design the new functions destined to the industry in the sense of supplying essential needs of the Brazilian society.

Such a scenario will be complemented with two essential policies. On the one hand, with a view to implementing a new, more efficient and fair taxation, priority will be given to tax reform to unlock and simplify processes that are detrimental to the good performance of the industry. On the other hand, trade policy will be rescued as an essential complementary activity within the scope of the new industrial policy, aiming to take advantage of the new opportunities that are opening up for the country.

With this, the authors believe that in the coming years, industry will be the guiding principle of an economic policy also aimed at generating employment and income, including with positive effects on the service sector. And that will mean a future with economic growth and social inclusion.

Critical points in the “neo-industrialization” proposals

For decades, researchers from various international organizations have been warning about the risks of maintaining an economic system based on unsustainable energy bases. Therefore, since the beginning of the XNUMXst century, the need for a transition to a low-carbon economy that is environmentally sustainable has been evident. Therefore, the challenge is increasingly evident, considering that without tackling the larger problem that leads to climate change, it will be difficult to build effectively sustainable economic models of development.

In this respect, it was not clear in the presidential document what is actually the type of industrialization that is intended to be promoted in the country with the new proposals presented. It is evident that the country's current economic model based on the tripod “intensive exploitation of natural resources, low productivity and high dependence on commodity prices in the international market” is not sustainable. In addition to the previous gap, it is clear that the new industrial policy presented does not contain a broader framework that is capable of incorporating and contemplating new sectors, especially those related to the low-carbon economy.

It also appears that other policies have not received due attention. Among these, the clear absence of the definition of educational, scientific and technological policies that are capable of breaking with the process of dependence on fossil fuels and, at the same time, boost the transition towards the construction of a sustainable development model stands out. . This implies going beyond the traditional actions restricted to the definition of specific tax incentives and localized subsidies. In addition, the “neo-industrialization” financing policy did not receive specific details, that is, can this policy be subsidized for some sectors that will be prioritized?

In summary, it is possible that the debate on the reindustrialization of the country will have to face an even broader issue that concerns the foundations of the macroeconomic policy that has been under way in the country for decades.

First orthodox reactions to the proposals of the Lula-Alckmin government

After President Lula and his vice-president Geraldo Alckmin presented the article on deindustrialization and pointed out some ways to resume the reindustrialization of the country, the reactions of some orthodox economists were immediate. In an article published in the newspaper Folha de S. Paul On May 28.05.2023, XNUMX, columnist Samuel Pessôa – researcher at IBRE(FGV) and JBFO – reacted to the current government’s proposal with the article “Mistaken agenda in the industry: program for cars goes against the environmental agenda and adjustments to public accounts”.

After presenting data on the fall in the share of industry in the Brazilian GDP in recent decades and discussing some reasons for such an occurrence, the author went on to defend the idea that “the fall in the share of industry in the GDP is a normal phenomenon and shared by countless economies. ”. Next, Samuel Pessôa criticizes “heterodox and developmentalist” economists because, according to him, such professionals only “emphasize industrial policy and the existence of subsidies granted by development banks”, in addition to forgetting two fundamental factors: the extremely high savings rate of Asian economies and high-quality public primary education systems.

With that, the author concluded that these factors “explain much better the high participation of the industry in the GDP than their BNDES”. Clearly, an attempt is made to open the window for future criticism of the possible resumption, by the Lula government, of new investment plans led by the BNDES to stimulate the country's industrial production. In the end – and making use of themes that clearly do not hold many domains – the author states that the measures announced to reduce car taxes for the middle class go against the grain of the adjustment of public accounts and will place the country “at the forefront of backwardness”.

Along the same lines – and on the same day – Arminio Fraga – another orthodox economist – published an article in the newspaper The state of Sao Paulo titled “Neo-industrialization: important, but how?”. Initially, the author informs that he intends to have a constructive debate in the light of Lula's and Alckmin's propositions on the resumption of the country's industrialization. To this end, it presents various data on the fall in the share of the industrial sector in the country's GDP, as well as the fall in the share of Brazilian industrial production in the global industrial GDP. At this point, his arguments join those of the previous author, making it clear that the problem of deindustrialization is a worldwide phenomenon, without making any mention of natural and premature deindustrialization.

Initially, he defends the thesis that the industrial sector has long received subsidized credit from the BNDES, protection against competition and tax incentives, elements that promoted the creation of a circle of technological backwardness. But at the same time, it recognizes that it is a heavily taxed sector, a situation that could be resolved with a good tax reform, which would lead to increased productivity.

Finally, it recognizes that interest rates are at very high levels and that the new fiscal framework comes at a good time, since – if complied with – it will be in the right direction to build a robust fiscal regime. That is, before any attempt to promote subsidies and open new credits to productive sectors, it is necessary to control public accounts in accordance with the law.

In addition, it is stated that the reactivation of the National Council for Industrial Development, which assigns new missions to the industry, is vague and represents “an old idea in a new guise”. This allows him to categorically state that “failed developmentalism is back” because Lula and Alckmin's article “only mention pompous themes, such as complexity and diversity in the economy, resilience, national content and strategic sectors”, which reveals some degree of of ignorance of the importance of some of these themes in the contemporary economic debate.

In the same critical line and in line with a previous author, it is stated that “the Asian model worked because it has high savings and investment and was successful in education and production for export”. Therefore, it is adamant that such a model is not suitable for Brazil. To this end, he concluded that, in order not to repeat past mistakes, the way out would be a tax reform that would fight against the Custo Brasil allied to environmental and social policies – themes that normally escape his typical conventional analyses.

Critical considerations on these orthodox interpretations

A first point that permeates the interpretation of the two authors is that deindustrialization, both in Brazil and in other countries, is a natural phenomenon.[I] In this case, the two articles cited in the initial section of this study reveal the importance of distinguishing natural deindustrialization from premature deindustrialization.

A second aspect is that it is not enough to indicate that the industry has lost participation in the country's GDP, trying to credit this decadent performance to the excess of subsidies destined to the sector, which ended up promoting the “technological backwardness”. In this case, both fail to mention that the exchange rate appreciated for decades was the main factor that promoted the loss of competitiveness of the manufacturing industry and, consequently, contributed to boost the country's deindustrialization.

A third point concerns the association – undue in our view – of industrial policy to “failed developmentalism” as if the Brazilian deindustrialization between 2003 and 2014 was the work of industrial policy. No mention of high interest rates and an appreciated exchange rate. Just a note on the increase in the tax burden, which actually occurred, but which is not the only determining factor in this case.

In summary, the two articles call into question the arguments and propositions about a new public policy with the purpose of interrupting the ongoing industrialization process, alerting to the fact that the priority at the moment is the construction of a “robust fiscal framework” and that any more developmental action in the industrial sphere would represent the “vanguard of backwardness”.[ii]

* Laura Mattei He is a professor at the Department of Economics and International Relations and at the postgraduate program in Business Administration, both at UFSC..

References


FRAGA, A. Neo-industrialization: important, but how? Newspaper The state of Sao Paulo, 28.05.2023.

FEDERAL GOVERNMENT OF BRAZIL. Neo-industrialization for the Brazil we want. Brasília (DF): Lula/Alckmin Government, May 25, 2023.

OREIRO, JL; MARCONI, N. Wrong theses in the debate on deindustrialization and loss of competitiveness in Brazilian industry. NECAT magazine, year 3, n.5, p.24-48, Jan-Jun 2014.

PALM, JG De-industrialisation, premature de-industrialization and the Dutch-Desease. NECAT magazine, year 3, n.5, p.07-23, Jan-Jun 2014.

PESSÔA, S. Wrong agenda in the industry: program for cars goes against the environmental agenda and adjustment of public accounts. Newspaper Folha de S. Paul, 28.05.2023.

Notes


[I] We could allude to this interpretation in the social sphere by stating that hunger and poverty are also natural phenomena and not the result of perverse social relations, as Josué de Castro explained.

[ii] The author is grateful for the comments and suggestions of Professor Luiz Fernando de Paula on a preliminary version of this article


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