Wheels of Industry Slowing in Brazil

By Mario Osava Reprint | | Print | |En español

RIO DE JANEIRO, Mar 6 2013 (IPS) - Industry is the ailing sector of the Brazilian economy, with production falling 2.7 percent in 2012 in spite of government incentives, and in contrast with the strong expansion of retail trade and the lowest unemployment rate in history.

The enigma of a stagnant economy that nevertheless has symptoms of growth that is happening too fast for the country to handle, including a shortage of labour and rising inflation, appears to be explained in several recent publications.

Some of the causes mentioned by economists are a fall in the number of young people joining the labour market and accumulated excess inventory.

The slowing of manufacturing activity is the chief concern of the government of President Dilma Rousseff and economic operators, because it accentuates a trend that calls into question the future of the country. Deindustrialisation, recognised years ago by industrialists and a few economists, is now hard to ignore.

Improved forecasts for this year are raising expectations. But low levels of investment, reflected in the 11.8 percent fall in production of capital goods in 2012 and the surge in inflation, which may cause the Central Bank to take measures to curb demand, do not support the promise of a vigorous recovery.

Results at the close of 2012 were “a bucket of cold water,” frustrating hopes of resuming the path of growth and indicating that “the crisis is deeper” in Brazilian industry, and not just a circumstantial effect attributable to the severe problems facing the global economy, said Julio de Almeida, a consultant at the Institute for Industrial Development Studies (IEDI).

Brazil “has not kept up with the development of global industry” in the last 20 years, as China, South Korea and India have done, he told IPS. As it has not developed the most dynamic sectors, like electronics and the pharmaceutical industry, it has not advanced enough in technological innovations, either, he added.

For the past 15 years, industry and certain “organised services” have also been suffering from an accumulation of costs, whether logistical, financial or energy-related, which have harmed their competitiveness, he said.

To cap it all, wages have increased in the last five years at a rate much higher than productivity. Only last year they rose by an average of 5.8 percent, while productivity fell by 0.8 percent, according to IEDI.

It is possible for less competitive countries to survive if the world economy is growing at a good rate, but problems appeared with the crisis that broke out in 2008 in the United States and then spread mainly to Europe, which “shrank the industrial market” worldwide and created intense competition in the domestic Brazilian market, de Almeida said.

In spite of it all, de Almeida believes that this year there may be some recovery, thanks to government measures to reduce electricity costs, cut taxes for some industrial sectors, lower interest rates and stabilise exchange rates, as well as its announcement of large forthcoming investments in transport infrastructure.

However, it will be necessary to boost productivity by investing heavily in technological innovations, especially because Brazil’s industrial base is “aged,” he said.

In fact, the mechanical engineering industry, especially the automotive industry, is increasingly predominant in the country.

With its long production chain, ranging from automobile parts to agricultural machinery, the automotive segment represented 21 percent of industrial production in 2011, according to the National Association of Automobile Manufacturers (ANFAVEA).

This proportion has doubled in the last 20 years, while the contribution of manufacturing as a whole to GDP has declined, falling to 14.6 percent in 2011. In other words, the importance of automobiles in the Brazilian economy is still rising.

As a result, the main government measure to reduce the recessionary effects of the international financial crisis was to cut taxes on vehicles, from December 2008, after three months of a sharp decline in sales. The strategy had been used before in other crises.

Oil and steel are also key elements in Brazilian efforts to reverse deindustrialisation.

Recovery is being sought in the shipbuilding industry, taking advantage of the oil discovered under a salt layer deep below the sea bed of the Atlantic ocean, close to the Brazilian coast.

In order to bolster national production, legislation was designed to demand variable and increasing proportions of Brazilian-made components, that may reach up to 70 percent of every ship, platform, depth sounder and other equipment constructed for oil extraction.

All these state interventions, such as tax or financial incentives for specific sectors and measures seen as protectionist, including customs barriers and requirements for a high national content for products like automobiles, as well as oil tankers, are rejected by many free market analysts, who have a keen following among operators and media specialised in economics.

Deindustrialisation is not necessarily a “sickness,” since “industry is doing badly, but Brazil is doing very well,” with high employment and high wages, said economist Edmar Bacha in interviews last year when he announced a book he edited, titled “O Futuro da Indústria no Brasil” (The Future of Industry in Brazil), published in February 2013.

According to the book, the manufacturing sector in Brazil lost competitiveness mainly due to the rise in wages, which drove up costs.

The average wage in Brazil grew 14.4 percent a year between 2006 and 2011, a global record seconded at a great distance by Australia, which had nine percent wage growth, according to co-authors Beny Parnes and Gabriel Hartung.

Bacha, who took part in previous governments that implemented more free market economic policies, maintained that competitiveness is not built by protectionism, but by more open trade, allowing integration into international production chains. Mexico is cited as an example.

Taking a broader range of expert views, the only point of agreement about the loss of industrial capacity is that it is caused by lack of competitiveness. But there are broad differences in interpretations of its origins and solutions.

Analysts in the commodities sector, for instance, question the primacy attributed to industry as the driver of progress and innovation. They argue that agriculture today adds a great deal of technology and knowledge, involving scientific research and mechanisation.

But the Brazilian government is led by so-called “developmentalists,” for whom economic growth is paramount, and chief among them is President Rousseff herself.

It is ironic, then, that industrial decline continues while the country is administered by leaders who prioritise the sector and, to recover its competitiveness, have adopted measures accused of being overly interventionist by the partisans of free market solutions.