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Manufacturing sector lacks long-term industrial policy

By 15 de October de 2014February 8th, 2017No Comments

By Vanessa Jurgenfeld São Paulo

A devaluation of the real could help a large part of Brazilian industrial sectors to reverse the crisis faced in recent years. But it would be enough just as a short-term measure. Regardless of who is going to be elected as president, scholars of the manufacturing industry interviewed by Valor believe that in the long-term Brazil will also need to rethink its policy specifically geared to the industrial sector, and focus largely on advances in technological innovation.

Renato Garcia, a professor at the Institute of Economics of the State University of Campinas (Unicamp), says that while many industries are in trouble, the real’s appreciation affects mainly those whose price/salary ratio is very important for their competitiveness, more subject to competition with imported goods, as is the case of the textile and footwear sectors. He believes that a reversal of the currency overvaluation can help change the current situation of these industries.

‘Assuming there is a devaluation of the real against the dollar, many of these sectors will recover. This is likely to occur with the production of more commoditized products, which are internalized rapidly,’ he said, citing as an example food, furniture, some segments of ceramics and plastics, shoes and more basic textile products. These are sectors with diffuse technology, in which the difficulties in reassembling possibly disabled factories are smaller.

The Brazilian manufacturing industry’s crisis was reflected in recent years mainly in the production of ten sectors, according to the Annual Industrial Survey (PIA), which tracks the performance of 24 industries. Sectors most affected so far include textile, wood, pulp and paper, coke and petroleum products, chemicals, pharmaceuticals, metallurgy, IT and transport equipment. In these 10 segments was observed, albeit at different degrees, the reduction of their stake in the Industrial Transformation Value (VTI) within the total value generated by the manufacturing industry, comparing  data from 2012 (the most current available) with 2007 – a year before the outbreak of the global crisis.

The VTI is an important measure because it shows how much added value is generated by each sector within the manufacturing industry, thereby contributing to GDP performance. To some economists, this indicator makes up the basket of variables that signal a deindustrialization underway in the country, with some of them saying this phenomenon occurs at an early stage in the country. Besides the VTI, other indicators show difficulties such as increased imports in different segments at the expense of domestic production.

Anita Kon, professor of economics at Pontifical Catholic University of Rio de Janeiro (PUC, São Paulo), agrees that a devaluation of the real would be of great importance to the industrial sector. But she highlights that changes in only one variable of macroeconomics are not enough to reverse the crisis in the sector. ‘Entrepreneurs also need lower interest rates and an effective long-term industrial policy,’ she says.

The proposal for a new industrial policy is reinforced by some economists who criticize the current one, the so-called Brasil Maior group (Greater Brazil). ‘We have no industrial policy. There´s no use of having a policy that it is only on paper. We need a long-term industrial policy that it’s not to plug the hole or extinguish a fire,” Ms. Kon says. As for Mr. Garcia, with Unicamp, he says he recognizes the merits of Brasil Maior, but points out that there are some flaws, like the fact that in some cases there were more compensatory measures to the industrial sector than sustainable ones that induce long-term changes.

Moreover, economists highlight the need for long-term industrial policy since the manufacturing industry’s most crucial problems are not solved with macroeconomic changes, such in the foreign-exchange market. Mr. Garcia points out, for example, the low investment innovation, inability of Brazilian companies to participate more in global value chains, as well as the inability of the industrial sector of incorporating sustainable long-term capabilities.

As essential elements of this new long-term industrial policy, Ms. Kon cites improved conditions for working capital, improved infrastructure for companies to export more and aligned macroeconomic and microeconomic measures. ‘If a certain interest rate (Selic) is established, one should not only think in macro [macroeconomic] balance, but that it [the interest rate] will have influences of different types in the industry,’ she explains.

Like Ms. Kon, Mr. Garcia also advocates a long-term industrial policy, which elects priority sectors. ‘In some cases, the tram passed and we missed it, but we have to try to think going forward,’ he says. For example, he cites the electronics industry, such as chip manufacturing, which was not internalized by Brazil. ‘And even things you could do in the chip as design, packaging, you cannot do anymore. But that does not mean there is nothing to do. But we need to identify sectors. ‘

Some technology-linked segments are among the ten sectors that showed a weaker performance in the PIA survey. A better result in the technology industry would be important to boost the country’s growth, including putting it in a better position in global production chains, according to some economists. In addition, the list shows that there is certain heterogeneity of the crisis: it goes from the textile to metallurgy and transport, albeit at different intensities.

Although the exchange rate has been identified as an important tool to end the manufacturing sector’s crisis, economists say there is a low probability that the government – whoever is the president in 2015 – will change the currency policy since this measure would increase costs and may have effects on inflation. The government has been acting in the forex market to avoid excessive devaluation, following the understanding that this could have an impact on inflation, by making imports more expensive.

‘It is possible that the change in the exchange rate will not come from deliberate measures by the Brazilian government. Everybody is watching the Fed in the United States. If there is an increase in interest rates there, certainly there will be changes in the Brazilian foreign exchange [market],” Mr. Garcia believes.

On the other hand, economist Sandra Rios, director of the Center for Integration and Development Studies (Cindes) think the country, however, should not fear the ‘dismantling’ of vertically-integrated production that has been happening, what some call the lost links of the productive chains or deindustrialization. She believes that Brazil should specialize in the production in which is already more competitive or more innovative steps that would bring greater added value, without worrying about some losses that occur along the way.  In her opinion, ‘dismantling’ is part of a natural global process, considering the new way of working in the manufacturing sector in global supply chains, in which large companies choose where and what to produce in each country, according to their interests.

Although Ms. Rios also agrees that the real’s overvaluation is harming the industry, she believes that the country needs to pursue specializations, as a producer of raw materials. ‘I think we need to seek expertise on links we can be more competitive,’ she says. ‘There’s a general and inescapable specialization to a country rich in natural resources, which is our case,’ she points out.

On labor-intensive sectors like textiles and footwear, Ms. Rios thinks that the country will not be able to compete with prices if it has no comparative advantages regarding labor costs. ‘Before the emergence of China on the international market, bringing all the countries of the region with it, we could even have some comparative advantage on this, but this is not the case of Brazil today. On one side we now compete with countries that are in fact abundant in labor and, on the other hand, we also have increased employment in Brazil and higher labor costs that do not allow us to compete in this niche [labor intensive] of price,’ she says.

Ms. Rios explains that Brazil tries to resist precisely to this global trend of reducing the vertically-integrated production. ‘The emphasis on policies that seek to counteract this trend end up harming the competitiveness of sectors that are on the edge of the supply chain,’ she says. ‘When you develop a policy to maintain local production of all pieces, parts, components, inputs and capital goods, it is inevitable that there is an enhancement of production that will be felt more intensely in the links of the chain that are more on the edge,” she adds.

In her opinion, the solution is not an industrial policy that identifies priority sectors. She says that where the country will be able to extract more value is in design, branding, or in products sometimes intensive in typical Brazilian raw materials. ‘It may even have a textile factory for more sophisticated products, with a special cut, or that you have some advantage to produce locally, as swimwear, with a kind of design still worth producing here because of the proximity to the location of product. But it is hard to imagine that the country will be competitive in synthetic mesh-shirt or production of rubber shoes,’ she points out.

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