By Mansueto Almeida

Since the beginning of the year, when it was reported that the manufacturing industry growth in 2011 was only 0.2%, the Brazil de-industrialization debate has intensified. And in the midst of this debate, what you see is a war of conflicting indicators, which makes the discussion confusing for economists, politicians, businessmen and the public. Below, I will try to shed some light on this debate for the reader.

First of all, what does the data show? Regis Bonelli and Samuel Person, from the IBRE-FGV institute, made a very thorough data survey and show that, in fact, the share of industrial activity in the Brazilian gross domestic product (GDP) decreased from 23% (1973-1976) to 16% (2009-2011). But the fall in this specific period was a global phenomenon, with the exception of Asian countries which are not major producers and exporters of commodities and have very high savings.

In fact, when evaluating the issue from a GDP per capita perspective, Brazil in the 70’s had a greater industry participation than other countries, a phenomenon that some economists have recently dubbed the “Soviet Disease.” Thus, by analyzing longer periods of time, the de-industrialization thesis does not hold. Manufactured products became cheaper, part of what was regarded as “industry” is now classified as “services”, hence the loss of industry participation in the GDP is not something “abnormal”.

Second, by just looking at the most recent period, the data shows that there is a serious competitiveness problem within the Brazilian industry. Since 2008, the production output is almost stagnant, despite the still positive growth in formal employment and the recent recovery of value-added exports which in 2011 were nearly identical to 2008: US $ 92 billion.

But again, the fall in manufacturing output that followed the 2008 financial crisis was much more of a global phenomenon (excluding China) and not specific to Brazil. However, it is agreed that in the post-2008 world, there is an excess supply of manufactured products looking for markets where there is growth in demand, such as Brazil. Given the high costs of production in Brazil, the trend is for increased imports of manufactured goods and the replacement of parts of domestic production by imported products. The bigger concern, therefore, is what lies ahead than what was left behind.

Third (and this is perhaps the most sensitive point of this discussion), although many view the appreciation of the real as a “curse”, this appreciation happened because of the strong gains in the terms of trade due to the increase in the average price of exports (commodities) and a drop in the average price of imported (manufactured) goods.

This is far from being a curse. Gains in the terms of trade are positive and enrich the country. One can discuss, however, the use of this wealth. In Brazil’s case, there is no doubt that the society has chosen to use this ‘Goddly wealth” to increase present consumption.

Thus, in order to increase the investment rate of the economy, we need (eve if we are richer) the help of the rest of the world (foreign savings), which has the adverse effect of strengthening the Real even more and increasing production costs in US dollar.

If the gains in terms of trade have been used to increase savings and investment, possibly interest rates would have been lower and the currency weaker. But that’s not what the society and the government decided.

The truth is that with a minimum salary close to US$350 and given our productivity rates, Brazil has become an expensive country for the production of labor-intensive products. Countries like Bangladesh, Cambodia, Pakistan, Indonesia and Vietnam, which are major exporters of garments to the US, all have minimum wages of less than US$100.

Additionally, the production of more sophisticated products, such as capital goods, is also expensive in Brazil and I’ve heard businessmen in this sector urgently requesting an exchange rate of R$2.30 (BRL/USD). In the short term, raising the exchange rate to this level would require excessive intervention in the exchange market and protectionist measures which would make inflation soar, doing more harm than good for the industry.

It is worth remembering the case of Embraer, one of the most innovative companies, the country’s fourth largest exporter (US$4.16 billion), but also a major importer (US$2.51 billion). Its competitiveness depends, among other things, to the reach of added-value inputs produced around the world.

Overall, the industry in Brazil suffers from “micro” problems (low productivity, low innovation capacity, high costs of inputs, etc) and from the consequences of a macro model based on high public spending, tax burden and an ever increasing dependence on foreign savings to finance investments. This debate can be a good opportunity to reevaluate our growth model, because the recent government measures will do little to increase the competitiveness of the Brazilian industry.

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