ECONOMY-BRAZIL: A Return to Bygone Import Substitution Model

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Mar 7 2002 (IPS) - The Brazilian government is guiding the economy down some new paths and returning to some old ones, forced by the need to boost trade surplus as a means to reducing vulnerability to the impacts of foreign economic crises.

Import substitution, stimulation of domestic industry, and aggressive competition for export markets – mechanisms that were excluded from the predominant economic vocabulary for more than a decade – have returned as explicit policies of the government.

“Now finally, although belatedly, the government has awakened from its naïve belief in economic liberalism, which prompted it to renounce an activist trade policy,” economist Antonio Correa de Lacerda, head of the Brazilian Society of Transnational Corporation and Globalisation Studies, a think tank, told IPS.

Brazil should produce merchandise that replaces imports and should expand exports, because the country needs an annual trade surplus of 10 billion dollars if it hopes to overcome dependence on foreign capital, which limits economic growth, Lacerda said.

This South American giant, home to 170 million people, achieved a surplus of that magnitude during a good portion of the 1980s, and until 1994, putting an end to decades of hyperinflation. In that period, monetary stability became a top priority.

To contain prices, imports were stimulated through tariff reductions and currency overvaluation, justified as means of updating equipment and technology aimed it improving Brazil’s industrial competitiveness.

As a result, the trade balance plummeted from a surplus of 49.4 billion dollars accumulated from 1991 to1994 (an average of 12. 4 billion dollars a year) to a deficit of 25.6 billion dollars over the following six years (an average of 4.3 billion dollars a year).

In spite of the sharp depreciation of the currency, the real, begun in January 1999, when Brazil adopted a floating exchange rate, a trade surplus did not appear until last year, when it reached 2.6 billion dollars.

Obligated to pay interest on public debt and other expenditures, such as transport and rising government bond payouts, Brazil holds unfavourable external accounts, covered only by the high volume of foreign direct investment of recent years, most of which was attracted by the government’s ambitious privatisation programme.

Brazil’s interest rates have been among the highest in the world since 1994, meant to attract capital and keep inflation in check, particularly when confronted with the economic crises in Asia (1997), Russia (1998) and currently in neighbouring Argentina, whose economy took a nosedive late last year after withstanding a recession since 1998.

The result was mediocre economic growth over the last seven years, an average of 2.6 percent annually, or half the pace the government has aimed for.

In order to overcome the foreign accounts imbalance, the only solution is to boost trade surplus, says economist Lacerda. To do so requires an industrial policy that both promotes import substitution and increases exports.

That implies a combination of production incentives and a trade policy that stimulates investment, attracting major international companies with the promise of Brazil’s market potential and with the possibility of exporting from local factories to other markets, particularly within Latin America.

Brazil has a large trade surplus in the agricultural sector, which last year neared 19 billion dollars. But it is nearly outweighed by the deficits of the electronics, chemical and capital goods sectors, stated Lacerda.

Farm production is seeing “declining prices and only a scant increase in demand,” unlike the dynamism of the sectors in which Brazil is a major importer, an unfavourable trend that must be halted through import substitution measures, he said.

Such replacement efforts are already taking place, but are in the early stages, according to the head of the Inter-Ministerial Chamber of Foreign Trade, Roberto Giannetti da Fonseca, who pointed to major corporations, such as South Korea’s LG and Samsung, are setting up shop in Brazil to produce electronics components.

The policy of fomenting industry is already manifest in several government measures, such as a tariff exemption for equipment in key sectors.

Another example is the reduction of domestic taxes on the production of printing paper, which improves the competitiveness of the national industry, said Giannetti.

In recent years, the government has promoted industry- supporting measures, such as facilitating credits and technological advances, but “in an unsystematic way,” says Flavio Castelo Branco, chief of economic policy at the private-sector National Confederation of Industry (CNI).

“Just recently have the authorities begun to gradually adopt an industrial policy as an axis of development,” he added.

The reduction of the basic inter-bank tax from 19 percent to 18.75 percent annually, adopted by the Central Bank on Feb 20 after eight months without changes, is another boost for economic growth, which this year is expected to surpass the two percent that was forecast by the CNI, according to the economist.

The government is also turning to the World Trade Organisation (WTO) to challenge the subsidies, quotas and other barriers that stand in the way of Brazilian exports and depress prices for key products like sugar, orange juice and soya.

With more decisive action in exports and import substitution, Brazil’s economy could be growing at more than five percent within three years, predicts Julio Gomes de Almeida, director of the Institute of Industrial Development Studies, linked to the business community of Sao Paulo, the country’s leading industrial centre.