Brazilian Development Strategy: Three Thoughts

1. Three thoughts on Brazilian development strategy Ricardo Bielschowsky, IE-UFRJ Minds` New Economic Thinking Conference Rio de Janeiro, November 2011

2. A definition of development strategy and pattern • Development strategy is the design of the conduction of a desired pattern of development (by government and social actors); • A pattern of development is a country-specific combination of three elements that affect investment, structural change and productivity in a country : • i) Resource endowment (natural, human, existing productive structure); • ii) Market-drives (external vs. domestic market, elite vs. mass consumption); • iii) Coordination and leadership of the investment process (including macro policies);

3. 1. Is there a new development strategy in Brazil ? What about a new development pattern?

4. Three phases of development in Brazil (1950-2011)

5. New development strategy ? It is possible to pick up in federal government Plans (over 20 in the 2003-2011 period), and in the Brazilian economic debate, elements that form an “embryo” of a national development project : it would consist of three “engines of investment”, and a fourth potential one; and four other “critical dimensions” of the development process; New development pattern ? Three out of the four engines of investment seem to be at work (in a promissing way)

6. The three “engines of investment”, and the potential fourth engine (complementary to the three actual ones) Mass production and consumption; growth cum income redistribution (in progess); 2) Natural resources activities and their productive linkages (in progress); 3) Infrastruture and its productive linkages; at work (in progress); 4) Innovation, high tech sectors, capital goods sectors (large difficulties)

7. Four other critical dimensions Social welfare, social inclusion (in progress, long way to go ) Reduction of regional disparities (with horizontal policies, difficulties in investment programs) Sustainable development (some modest progress) Institutional reforms (gradual and incremental)

8. 2. Questions raised from a structuralist standpoint to Brazil’s four potential investment drives

9. Core elements of the structuralist analytical tradition (all still very actual) • 1) Structural productive heterogeneity (plus low average productivity, unlimited supply of labour, and property concentration) = bad income distribution and poverty (social heterogeneity as the “mirror” of productive heterogeneity); • 2) Low (“inadequate”) productive and export diversity = external vulnerability and balance of payments desequilibrium (today’s additions : liberty and volatility of capital flows + “reprimarization” due to exchange rate appreciation and to China/Asia; and relief because of resource endowmentin the chinese era) • 3) National states are not prepared to the social functions of investment and technical progress; relative weakness of entrepreneurship lead to weak propensity to invest and innovate = low investment and innovation rates

11. 3. The need of pro-investment macroeconomic and industrial policies

12. Pro-growth macroeconomic policies and state support to the four potential engines of investment are badly needed: disincentives to investment have been very high in the 1980s (debt, inflation, etc) and also quite high thereafter (in Brazil and Latin America); (Hypothesis: there is a long list of causes of low investment rates in Latin America and in Brazil since the 1990s);

13. Ten causes of low rates of investment in Brazil (1-3) • 1) Finance liberalization and volatility of capital flows have generated large macro instability and damaged confidence; • 2) Trade liberalization decreased profitability and increased risks and uncertainties in tradable sectors (exchange rate appreciation decreased profitability further on); • 3) Privatization means higher demand for profitability and higher aversion to risk and uncertainty;

14. Ten causes of low rates of investment (3-6) • 4) The accelerator effect was weakened by deindustrialization caused by trade opening and exchange rate appreciation • 5) Until 2006 : public sector investment was constrained by fiscal orthodoxy (and until 2002/3 by neoliberal policies); • 6) Because of the former, private investment became less induced by public investment – lower “crowding in”;

15. Ten causes of low rates of investment (4-10) • 7) Growth has been relatively slow (more bad years than good years), meaning scarce demand incentives to • invest (and pessimism as to sustained future growth); • 8) Interest rates have been very high, especially to working capital; • 9) Appreciation of the exchange rates weakened incentives • to investment in tradable sectors other than natural • resources ones, and so did competition from China and • Asian countries; • 10) Current world crisis is obstructing the continuation of investment recovery

16. Hypothesis : a cycle version of the low investment rate story - investment is being intensified only for a short while • Cyclical retraction have been deep and long lasting, and the upward phases of the cycle have been short (as have been analyzed by ECLAC); • The expansion periods of investment have had relatively short duration : besides short duration of growth periods, the accelerator works in a retarded form (lags behind) in the upward phase of the cycle, as a result of a cautious attitude by entrepreneurs, of the loss of productive linkages, and of the other above listed reasons. In other words, when engines of investment are finally fully at work, a crisis stops it.

17. Causes of low rates of R&D and innovation in Brazil • Multinational corporations are largely dominant in medium and high-tech sectors (and with a few exceptions produce knowledge in headquarters); • Appreciation of exchange rates reduces profitability in tradable sectors which are innovation-intensive, and innovation projects are highly risky investments; • Unlike in developed country experiences such as the US, Japan and Europeans, the Brazilian state does not know the existing supply of knowledge in national firms, and vertical industrial innovation policies become much more difficult to implement;

18. Three thoughts on Brazilian development strategy Ricardo Bielschowsky, IE-UFRJ Minds` New Economic Thinking Conference Rio de Janeiro, November 2011