Industrial Policy and development:
Lessons from Brazil
Volker Treichel
Lead Economist
Office of the Chief Economist
Brazil’s economic performance
• Paper draws attention to Brazil’s remarkable economic
performance over the past 10 years and discusses the
role of industrial policy in this performance.
• Growth during 2004-2010 doubled to an average of 4
percent from 2 percent during 1996-2003.
• Poverty declined from 35 percent in 2000 to 22
percent in 2009.
• Inflation declined from almost 15 percent in 2003 to an
average of 3 to 5 percent during 2006-2010.
Brazil’s industrial policy
• Focus on both hard and soft industrial policy
in the context of the Plano Brasil Maior
• Tax incentives
• Access to financing
• Infrastructure
• Education
• Research and Development
BNDES - Key role
• Bigger than the World Bank in assets and
disbursement
• Crucial role in providing access to finance to
key sectors
• Key principles of cooperating with the private
sector and of focusing on policy
implementation
But Brazil and LAC remain trapped in
the middle-income status
Figure 1: Ratio of Selected LAC Countries' GDP per capita to US GDP per capita
(1990 International Geary-Khamis dollars)
1
0.9
0.8
0.7
Argentina
0.6
Brazil
0.5
Chile
0.4
Mexico
Peru
0.3
LAC
0.2
0.1
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
0
Source: Maddison (2010).
Even though labor productivity has
been rising…
Figure 2
: Labor productivity in manufacturing
(value added per employee, US$)
60000
China
50000
Brazil
40000
Mexico
30000
20000
10000
0
1990
Source: UNIDO (2011).
1992
1994
1996
1998
2000
2002
2004
2006
Lack of industrial upgrading is the
problem
Figure 3: EXPY Trends for Latin America, China, and India
20000
Costa Rica
18000
Mexico
16000
EXPY
Argentina
14000
Brazil
Chile
12000
Colombia
10000
China
8000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: World Bank calculations based on Comtrade.
The Rise of China and LAC
• China’s performance since 1979
– An average annual GDP growth rate of 9.9%
– An average annual trade growth rate of 16.3%
• The Opportunity and Challenge to LAC
– China’s dynamic growth has contributed to a global
resource boom, which benefits LAC
– China became an important source of FDIs
– China’s export of light manufacturing products causes
some LAC countries to lose their light manufacturing
sector
Industrial Policy in a Market Economy
• Industrial policy is a useful tool for the state to
play the facilitation role.
– Contents of coordination may be different,
depending on industries.
– The government’s resources and capacity are
limited and need to be used strategically.
• To be successful, the targeted industries
should be in line with the economy’s latent
comparative advantages.
• But how to do it?
9
NSE and the Failure of Structuralism
• Structuralism advised governments to develop industries that were
too far advanced compared to their countries’ level of
development and went against their comparative advantages.
• The firms were non-viable in competitive markets and required
government policy support for their initial investment and
continuous operation.
• This led to rent-seeking, corruption, and political capture.
10
NSE and the Failure of the
Washington Consensus
• All transitional economies started with many nonviable firms in their old priority sectors
due to their comparative advantage-defying development strategy.
• The Washington Consensus failed to recognize that the distortions were endogenous
when advocating for the protection of nonviable firms in the priority sectors and advised
the government to eliminate all distortions immediately, which caused the collapse of
old priority sectors.
• The Washington Consensus also opposed that government play a proactive role in
facilitating firm entry into sectors consistent with the country’s comparative advantages.
• The dynamically growing transitional economies adopted a dual-track approach:
– The government continued to provide transitional support to nonviable firms in the old
priority sectors and removed distortions only when firms in those sectors became viable or
the sectors become very small.
– The government facilitated private firms’ entry to sectors that were consistent with the
country’s comparative advantage, which were repressed before the transition.
11
How to do it?
• Selecting sectors that are in line with the
country’s latent comparative advantage
• Compensating first movers through subsidies
and/or tax holidays
• Lowering transaction costs through improved
transportation and logistics, targeted skills
development
• Clusters of industries with similar profile.
Concluding Remarks
• Brazil has the potential to grow dynamically for decades,
and to become a middle-income or even a high-income
country in one or two generations, as long as the
government has the right policy framework to facilitate
the development of the private sector along the line of
the country’s comparative advantages and tap into the
latecomer advantages.
• Industrial policy will contribute to Brazil’s effort to cope
with the challenges and opportunities from the new world
economy and help it break away from the middle-income
trap and become high-income countries.