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Anna Ternova

24 September 2016
Brazils Guided Capitalism
Brazil started becoming fearful of losing the manufacturing industry in recent years due
to overseas competition, overvalued currency, and high costs. Most economists would say that an
economy of Brazils size will not manage to become developed without a flourishing
manufacturing industry. The governments response to fears of de-industrialization was a more
interventionist industrial policy which involved a combination of selective subsidies and
protection. Under Luciano Coutinho, the BNDESs (a Brazilian bank) role was to offer long-term
funding for infrastructure projects and large developments. Some economists believed it crowded
out private lending and that it was a means of exercising undue influence over the private sector.
Critics accused the government of a slow drift towards state capitalism, which emphasizes
benefiting selected companies, rather than letting the market work.
One of the largest manufacturers in Brazil lay in the automotive industry where it
eventually became a pioneering location for the global car industry. In 2012, it accounted for a
fifth of the manufacturing industry, with strong unions being a pillar of the PT. Lula and Dilma
constantly suspended sales taxes on cars to boost demand which increased Petrobrass import bill
for petrol, and clogged Brazils unimproved roads with traffic. With many other successful
industries, and some not as successful, Brazils manufacturing base was going through a process
of creative destruction and change, rather than pure decline. Multiple complex factors were the
reasons behind de-industrialization.
Another factor in the de-industrialization process was that most Brazilian businesses were
unable to raise productivity levels. 40% of Brazils economic growth in the past decade was the
result of an expanding labor force. The total tax takes also rose relentlessly. Labor laws were in
need of being reformed. Soon after Lula started talking of reform in the informal economy, a lot
of formal jobs were createdmainly because of the greater availability in bank credit and
simplified tax regimes. Lula ended up giving up, and an important opportunity to make the
system fairer and more efficient was lost. Problems decreased with the rise in wages and the
achievement of full employment. High incomes boosted demand for services which did not face
competition from imports. The cost of capital was another misfortune for businesses due to
incredibly high interest rates. In addition to that, the neglect that infrastructure and transport links
suffered played a large role in the industrys slow decline. This was due to the collapse of public
investment, and weak support from the state agencies in executing projects.
The Brazil cost affected farmers and service businesses too since the appreciation of
exchange rates made it even more painful for manufacturers and farmers. However, farmers had
a powerful competitive advantage, and service businesses were at least protected from foreign
competition. Amplified by the strong real, the Brazil cost made the country astronomically more

expensive than many others. Government officials eventually began to accept that Brazil had a
competitiveness problem and a lack of ambition to expand abroad. Many businesses did not want
to compete with foreign industries because costs were too high in Brazil. However, in the past
decade Brazil has seen a rise in multinationals and for the first time in 2006, outward investment
by Brazilian firms outstripped inward foreign direct investment. Brazil seemed to be developing
a unique kind of capitalism, one with married family companies, and bank holdings with a lively
public equity market.
Depreciation of the real in 2013 was likely to lift much of the short-term pressure on the
industry, but Brazils competitiveness problem was deep-rooted. A more effective industrial
policy would aim to promote competition and productivity-enhancing innovation across the
board, partly by a more aggressive effort. Creation of specialist education and training
institutions had played a pivotal role in encouraging manufacturing as well as adding value to
commodity production. A research scientist announced that the culture of innovation has finally
arrived in Brazil and that it could flourish under the right conditions.
Reflection
On page 229 of Reids book, he writes almost an entire page of issues on Brazils
infrastructure and transportation. Reid states that they were so neglected because public
investment in maintenance was weak, even though the state had massively expanded over the
past few decades. The thing is, knowing that there were many inherent issues in the country that
needed to be solved, Brazil still kept encouraging investment into the production of certain
commodities and services that should have been put on the back burner until the issues found a
solution. Although they are completely different scenarios, it reminds me of how Stockton
University is going about its expansion into a larger school. It is still a relatively new school and
so, it wants to keep admissions high so that the population can grow. However, they are not
keeping a proper development-to-enrollment ratio, meaning they are not keeping up structurally
and providing an appropriate amount of resources for the number of new students that they are
accepting every year. One of the inherent problems here at Stockton is the parking situation.
They closed two parking lots in order to build an entirely new science building, and even though
they built a new parking lot in the back of the school, they merely stopped the problem from
becoming worse instead of fixing it. Many of my professors have also stated that they cannot do
certain things in class that they used to do, due to the growing students-to-teacher ratio. The
point in all this is that the issues at Stockton have a similar underlying cause as the issues
underlying Brazil. This especially rings true when Reid mentions that the automotive industry
was producing more cars than the undeveloped roads of Brazil could handle. Of course, there are
various factors preventing these issues from being resolved quickly, but the point remains the
sameyou cannot expand a country on a rickety foundation, or else any storm that may come
through will blow it off its stilts, and cause more money and time to rebuild it rather than
investing that money from the start into creating a stable groundwork.