Brazil's Import Substitution Industrialization Strategy
Columbia University's Marco Troyjo has an excellent piece of analysis on Brazil's import substitution industrialization strategy, and what that could mean for the country's economy going further. It is by no means comprehensive, but give a solid, brief look at what makes Brazil tick.
Present day ISI 2.0 [ed: Import Substitution Industrialization Version Two] has two faces. It continues to apply high import taxes and other barriers to protect national groups and foster Brazil’s chosen industrial priorities (semiconductors, software, electronics, automobiles and others). As the country’s currency is clearly overvalued, its trade deficit in manufactured goods would be even larger if it were not for tariff shields – which contribute to the outrageous prices paid by Brazilian consumers for many foreign goods.
Much like its 1950s prototype, ISI 2.0 is clearly “nationalistic”. It nonetheless updates the concept of “economic nationalism”. Rather than merely sheltering Brazilian entrepreneurs, ISI 2.0 calls for the “Brazilianisation” of companies wishing to harness the potential of Brazil’s domestic market. An entire set of incentives is put to the service of those who decide to create jobs in Brazil. Its most powerful tool is the robust policy of government procurement which has found expression in the Lula-Dilma administrations (of Luiz Inácio Lula da Silva, president from 2003 to 2010, and Dilma Rousseff, president since January 2011).
What this means is that the country is vulnerable; heavily dependent on the growth of its oil industry and reliant on foreign direct investment. If one of those should go off-track - or more likely, if one, then the other - the economy loses its anchor and goes into a tailspin.
Brazilian economist Luis Carlos Bresser-Pereira, in commentary that originally appeared in Folha de Sao Paulo, points out the risk involved in this strategy. While import substitution industrialization backed by the oil industry led to very fast GDP growth, it also led to the risk of inflation and an overvalued Real. To combat inflation, the government continually increasing the minimum wage, which led to real wage increases across the board, lifting millions into the middle-class, of course, but also limiting any national surplus from the increase in commodity prices.
In the medium term, a growth policy oriented to the domestic market is as unfeasible as the alternative of an export-oriented economy. The domestic market and exports need to grow concurrently. A policy that combines exchange rate appreciation with nominal wage increases is suicidal in the medium term, because industrial corporations less efficient than ours will soon occupy our domestic market. This is what is happening today.
Brazil will have grown less than 3% [in 2011*], and it is unlikely that it will have a better performance next year. Investors are not being stimulated to invest, either by the domestic or by the foreign market. The foreign market is plummeting, pulled down by Europe, and followed by China and India, which have already reduced their growth rates. In this adverse international setting, and without internal room for the government's preferred economic policy, it is most probable that the Brazilian economy will continue to show poor growth. And there is always the risk of a significant drop in commodity prices, which will have a catastrophic effect on the economy.
It's worth noting,however, that not all are as pessimistic.
*Actually it's expected to be closer to 3.5%
