TO OPEN OR TO OPEN, THATS THE QUESTION Edmar Bacha ANNUAL MEETING OF THE BRAZILIAN-AMERICAN CHAMBER OF COMMERCE New York, April 14, 2014

BRAZIL: SINCE 1981, A PRISONER OF THE MIDDLE INCOME TRAP

EXIT FROM MIDDLE INCOME TRAP DEPENDS ON INTEGRATION TO INTERNATIONAL TRADE Exit from middle income trap depends on higher produtivity Higher productivity depends on firms with tecnology, scale, scope, and competition Post-WW-II examples: Israel and Asian tigers (industry) Europes periphery (services) Australia, New Zealand, Norway (commodities) Is Mexico a counterexample?

BRAZIL: ONE OF THE MOST CLOSED ECONOMIES IN THE WORLD Big economies, big exporters: US (1/2), China (2/1), Japan (3/4), Germany (4/3), France (5/5), UK (6/10) Brazil: 7th largest economy in the world, but only the 21st largest exporter Brazils GDP, 3.3% of world. Brazils exports, 1.3% of world. Giant in terms of GDP, dwarf in terms of exports Ratio imports/GDP Brazil: 13%. Lowest value among the 176 countries considered by the World Bank. Paradox: Brazil the 4th most preferred destination for foreign direct investment Open capital account, closed current account: recipe for impoverishing growth

CURRENT INDUSTRIAL POLICY: MORE PROTECTIONIST Response to deindustrialization and sectoral external deficits: Increase of nominal tariffs on imports Discriminatory manipulation of taxes (increase in tax compliance complexity) Generalization of local content policy Dissemination of basic productive processes Buy Brazilian act with 25% preference margin National champions selection by BNDES Petrobras as the sole operator and with a mandatory 33% stake in subsalt oil fields Result is less competitiveness and lower productivity

ALTERNATIVE INDUSTRIAL POLICY: INTEGRATION INTO INTERNATIONAL PRODUCTIVE CHAINS THREE PILLARS 1. Reduction of the Brazil cost Taxes and logistics Simplification of the indirect tax system: national VAT Ceiling on the expansion of government spending to allow reduction of tax rates Trade facilitation measures: roads, railways, ports, and customs

PILLARS OF ALTERNATIVE INDUSTRIAL POLICY (CONT.) 2. Trading lower tariffs for a more devalued exchange rate Pre-announced gradual program of reduction of tariffs and nontariff barriers Sequencing of liberalization: inputs first, final products later Exchange rate policy: reference rate with intervention in case markets dont make the adjustment (Unresolved question of articulation with policy of exchange rate floating) 3. Trade agreements Unilateralism vs negotiation What to do with Mercosur: backtracking on the external common tariff or a joint opening up?

CONCLUSION Besides opening up, Brazil needs higher savings and investment, better education, and a leaner and more effective State Opening up, a necessary but not a sufficient condition – as shown by Mexico Hirschmanian perception is that the opening up to trade will succeed in mobilizing the country to implement the other reforms Brazil needs to overcome the middle-income trap