1. NS4540 Winter Term 2019 Brazil: Reindustrialization
Oxresearch “Brazil: Reindustrialization faces formidable hurdles” December 29, 2016

2. Overview
The relative decline in the manufacturing industry’s weight in the Brazilian economy started 25 years ago.
However the pace has picked up in the last decade
The loss of industrial competitiveness behind this latest contraction results from
An overvalued and unstable exchange rate for most of the period
A poor business environment and
Increasing competition from Chinese industrial goods
Economists and policymakers of different political persuasions agree on the need to reindustrialize the economy, but no clear action plan for achieving that objective.

3. Brazil: Decline in Manufacturing

4. Poor Competitiveness
Multiple reasons explain the long-term loss of competitiveness of Brazil’s manufacturing industry
For most of the period since the mid-2000s an overvalued exchange rate has persisted increasing the competitiveness of imports
Despite recent depreciation, the instability of the exchange rate – which reflects Brazil’s political and economic environment – remains an inhibiting factor for production and investment decisions.

5. The “Brazil Cost”
The loss of industrial competitiveness also reflects from the “Brazil cost” a long standing list of problems facing businesses in the county. These include
A heavy tax burden on businesses coupled with a Byzantine tax- system
Excessive bureaucracy
High interest rates for companies unable to access funding from the National Development Bank (BNDES)
Rising wages and production costs in the last years, and
Poor infrastructure
As has happened elsewhere, competition with cheaper Chinese goods both in the domestic and foreign markets has also contributed to a decline of Brazilian competitiveness across several manufacturing sectors.

6. Brazil: Policy Response I
Brazil government responded to the global financial crisis with various policies aimed at boosting domestic demand
Tax breaks and
Credit expansion
While policies succeeded in creating higher demand for manufacturing goods – largely met by foreign production
Rising industrial imports contributed to
The weakening of domestic inter-industry linkages and
The deterioration of the trade balance of manufactured goods
Since 2014 manufacturing GDP has been shrinking consistently more than total GDP
However as a result of the country’s long and deep recession imports have dropped sharply and the trade balance has started to show signs of improvement

7. Manufacturing/GDP Growh

8. Brazil: Industrial Capacity Utilization

9. Brazil Trade Balance

10. Brazil: Policy Response II
Exports could represent an alternative for the manufacturing industry.
However their potential is limited by
The unstable exchange rate
The low competitiveness of most Brazilian manufacturing segments
The poor performance of the international economy
Stagnant global trade levels, and
Growing protectionism

11. Limited Policy Leeway
Most economists agree the country requires a new strategy for its manufacturing industry. However
Severe fiscal constraints and
High public and private indebtedness
Limit the government’s room for manoeuver
The government has abandoned the industrial policy based on subsidized credit and tax exemptions
Moreover Temer administration is inclined to promote greater economic openness and to seek bilateral and regional trade agreements
This is a move away from Brazil’s long-standing prioritization of multilateral trade liberalization under the WTO framework

14. Limited Policy Leeway II
While these moves in line with government’s objective of strengthening Brazil’s relatively weak links to global value chains, their potential effectiveness is unclear.
Some additional disruption provoked by increased consumption could deliver another blow to industry’s attempt at integrating into international production networks as a key supplier.
Unintended consequences?
There is further uncertainty regarding the impact on manufacturing industry of government’s plan to freeze its own expenditure in real terms for at least ten years.
Measure expected to restore investor confidence by signaling a clear and predictable path to reducing public debt
However, could also lower aggregate demand temporarily if prove sector does not offset the moderation in government spending

15. Industry 4.0 I
New technologies such as the Industrial Internet of things (LLoT),3D printing and artificial intelligence are already revolutionizing global manufacturing
For Brazil they represent both an opportunity to catch up with leading manufacturing economies and a considerable risk
Brazilian infrastructure is not suited for a massive adoption of LLoT in the short term
3D printing may favor the on-shoring of manufacturing activities by firms headquartered in developed countries, potentially threatening an economy whole industry is largely composed of foreign multinational companies

16. Industry 4.0 II
The longer the Brazilian manufacturing sector takes to adjust to this “new industrial revolution”
The higher the risk that it may have to rely solely on
Protectionism, and
The health of domestic and regional markets
Or shrink even further

17. Assessment
Numerous short-term constraints and structural challenges undermine Brazilian reindustrialization
In a context of:
Fiscal crisis
High private and public indebtedness and
Unemployment
An eventual industrial recovery would first meet demand increases by elevating capacity utilization before expanding productive capacity through new investments
Longer term reindustrialization will require further action, particularly to embrace technologies such as 3D printing and the Industrial Internet of Things