Looking at the Failure of Brazil’s Industrialization Upgrade from the Perspective of Monetary Policy

In the 21st century, many emerging economies have achieved a wave of rapid economic catch-up, increased trade volume, financial stability, and a narrow gap between the rich and the poor in China… The “convergence” of economic growth between emerging and developed economies has led to the emergence of Optimistic expectations. In 2008, the global financial crisis hit. Although the economic growth rate of most emerging economies achieved a “V-shaped” reversal in the first year or two after the global financial crisis broke out, the world economy encountered collectively in emerging economies after the “double bottoming” in 2012. The “growth dilemma” caused the optimistic expectation of “convergence” to vanish. Brazil is such a very representative emerging economy. As a commodity exporter, after the opening of the global commodity super cycle in 2003, the Brazilian economy stepped up one step. In 2005, the economic aggregate returned to Latin America, the first time in 2006 exceeded 1 trillion US dollars, and in 2010 exceeded 2 trillion US dollars. In 2011, it became the sixth largest economy in the world. According to the World Bank, from 2000 to 2009, Brazil’s contribution to global economic growth ranked fifth after China, the United States, India and South Korea. However, the good times did not last long, and the global economic downturn eventually hit Brazil in 2014, when the economic growth rate was only 0.5%. In 2015 and 2016, due to the domestic political and economic crisis and the global economic recession, Brazil’s GDP has been negatively growing for two consecutive years, and it is still in a quagmire.

Why can’t countries around the world develop together? Why do some countries can break the original development path and achieve sustainable economic growth? Why is Brazil still unable to escape the “doom” of recession after continuous self-breakthrough? This paper believes that premature de-industrialization or failed industrialization is the crux of Brazil’s attempt to fail again in the new century. The development of the Western countries and the rigid monetary policy are the institutional reasons for the “de-industrialization” in Brazil. One.

Typical facts of Brazil’s “de-industrialization”

Since the beginning of the 21st century, Brazil has experienced a trend of “de-industrialization”. If the mining, construction, and industrial production services sectors in the industry are removed, the decline in the share of Brazilian manufacturing in GDP is even more serious. For developed countries, although the proportion of its industry in GDP is also declining, it has completed the leap from the middle-income stage to the high-income stage, and the proportion of industry in solving employment and exports is still significant. There can be strong forward and backward linkages in the economy, and “de-industrialization” does not affect the long-term economic development process. But for Brazil, the turning point in the decline in the share of industry or manufacturing in GDP appears at a relatively low income level, and its income level is only a small part of the “de-industrialization” of developed economies, so it is also called “ Premature de-industrialization.”

First, although the proportion of industrial employment remained stable, the proportion of industrial added value to GDP declined significantly. According to the World Bank data, the proportion of industrial added value in Brazil’s GDP has declined by more than 10% in 1989-1990 and 1994-1995, respectively. The industrial added value accounted for the highest historical value in 1989 (42.3%). Dropped to 22.4% in 1995. Since then, this proportion has remained between 20% and 25%. However, in 2015, Brazil’s industrial added value accounted for less than 20% of GDP for the first time. In 2017, it was only 18.5%, which was 23.8 percentage points lower than the historical maximum.

Second, manufacturing shrinkage, which represents Brazil’s core competitiveness, is more severe than in the industrial sectors such as mining and construction. According to the World Bank, the trend of manufacturing value added in Brazil’s GDP is roughly the same as that of industry. However, unlike the industrial share, which has resumed growth in individual years, the manufacturing share has been declining since 2004. In 2017, Brazil’s manufacturing value-added ratio (10.2%) fell by 20.7 percentage points from the historical high of 1984 (30.9%). Considering the “super cycle” of global commodities since the 21st century, the Brazilian industry’s ability to resume growth in individual years actually benefits from the expansion of the mining industry, while the decline in manufacturing that can actually have a more significant impact on its domestic economy A more serious negative impact.

Finally, since the 21st century, Brazil’s trade surplus has shrunk, and the proportion of manufactured goods in total exports has also declined. According to data from the Ministry of Development, Industry and Foreign Trade (MDIC) of Brazil, the scale of imports and exports in Brazil was roughly equal in 2000. Since then, exports have grown faster than imports, accumulating large trade surpluses. However, since 2011, Brazilian exports have declined, and the trade surplus in 2015 has fallen by $26 billion from 2011. At the same time that exports have shrunk, the share of manufactured goods in Brazil’s total exports has fallen sharply, from 62% in 2000 to 41% in 2015. More seriously, despite Brazil’s trade surplus in low- and medium-tech manufactured goods, the growing trade deficit of high-tech manufactured goods and high-tech manufactured goods has kept Brazil’s trade in manufactured goods since 2008. “Into the super.”

In the process of catching up with the country’s economy, if it can specialize in the production and export of high value-added goods and services during the period when industrial or manufacturing added value accounts for a decline in the proportion of GDP, then the country’s experience Industrialization or “de-manufacturing” is actually the only way to rationalize the industrial structure and the transformation of the economic structure into modernization. On the contrary, when the production and export capacity of the late-developing countries is continuously concentrated in the middle and low-tech products, and this process occurs when it has not yet entered the high-income stage, it will cause the interruption of economic catch-up, the increase of inequality and the potential for innovation. decline. Unfortunately, Brazil has become the latter. In recent years, although Brazil launched the “Plano Brasil Maior” during the Rousseff government, it hopes to increase the proportion of manufacturing in GDP by 1.2 percentage points in 2009-2014, but the results have not been realized. Instead, it fell by 3.1 percentage points. If the newly revised national economic accounting system is adopted in 2015, the decline in the manufacturing ratio will increase to 3.6 percentage points.

Economic liberalization, inflation targeting and “de-industrialization”

Although Brazil has established the most complete industrial system in Latin America through the import substitution industrialization strategy during the debt crisis of the 1930s and 1980s, its industrialization is far from reaching the standard. Since the late 1980s, the share of industry and manufacturing in Brazil’s GDP has continued to decline. After the economic stabilization of Brazil in 1994, the proportion of manufacturing in the total output value declined to a greater extent. The long-term deficit in Brazil’s high-tech manufactured goods trade indicates that the country remains a net importer of capital goods, and structural contradictions remain prominent. Brazil’s “de-industrialization” is “premature de-industrialization” that occurs when its industrial development has not reached a certain height. It is a derivative of financial liberalization, trade liberalization and long-term exchange rate appreciation, and is the natural choice of its macroeconomic policy. result.

In 1994, Brazil launched the Real plan to control long-term high inflation rates through exchange rate anchoring. Under the influence of deregulation and economic liberalization, Real plans to successfully control inflation through a combination of high interest rates, exchange rate appreciation and a significant reduction in import tariffs, but it has adversely affected Brazil’s domestic economic development, especially the industrialization process. The impact. Due to the impact of the Mexican crisis in 1994, Brazil made policy adjustments in 1995, and the exchange rate policy changed from hard-peg to crawling, and the nominal exchange rate depreciated slightly. The outbreak of the Asian financial crisis has reversed global capital flows. Due to the relaxation of regulation, international capital has flowed out of Brazil, and the exchange rate of the Real has continued to be under pressure. At the beginning of 1999, macroeconomic imbalances and the loss of foreign exchange reserves caused the Brazilian government to abandon the exchange rate peg, allow the exchange rate to float freely, and at the same time declare the primary fiscal surplus target, and implement the inflation target system of monetary policy. The inflation rate replaced the exchange rate to become the macro economy. A stable anchoring goal, the Brazilian “trinity” macroeconomic policy framework was initially formed. Although inflation was controlled, in 1995-2016, Brazil’s average annual economic growth rate was only 2%. The main reasons for the slow growth of Brazil’s economy include external fragility, fiscal pressure, high interest rates and nominal exchange rate appreciation. These have all contributed to the “de-industrialization” of Brazil.

First, under the inflation target system, monetary policy has become the most important means of regulation and control of the macro economy. The interest rate has an upward bias, resulting in low investment rate and low formation rate of fixed capital. The inflation-targeted monetary policy targets price stability, and interest rates become the only policy tool. When the inflation rate is higher than the inflation limit set by the central bank, the interest rate increases, and vice versa. Due to Brazil’s history of high inflation for many years and high inflation expectations, the central bank must strictly abide by the regulatory principles to ensure that no dynamic inconsistencies are created. Therefore, in the long run, monetary policy regulation has an upward bias in interest rates, which has a negative impact on long-term economic vitality. The average interest rate from 2000 to 2016 reached 13.8%. High interest rates have seriously affected domestic investment tendencies and loans from banks in the banking sector, and fixed capital formation has a low proportion of GDP. According to data from the Brazilian National Bureau of Economic Geography and Statistics (IBGE), Brazil’s fixed capital formation shrank 0.7% annually from 1996 to 2003. During the period of rapid economic growth in Brazil from 2004 to 2010, it only grew at an average annual rate of 8.9%. From 2011 to 2013, Brazil’s annual growth rate of fixed capital formation fell to 2.2%, almost the same as GDP growth rate (2.0%), indicating that in the past three years, Brazil did not carry out capital accumulation.

Secondly, the exchange rate is unstable, and the appreciation causes the export difficulties to undermine the competitive advantage of the manufactured goods. The devaluation causes the interest rate to increase, which reduces the investment tendency and the manufacturing industry shrinks. Since the formation of the “trinity” macroeconomic framework in 1999, the Brazilian currency Real has been depreciating in 2000-2003 and 2013-2018, and has appreciated in 2004-2012. When the exchange rate appreciates, the relative price of Brazilian manufactured goods increases, coupled with the low competitiveness of Brazilian manufactured goods, its export is limited; when the exchange rate depreciates, because Brazil’s monetary policy takes into account the exchange rate target, in response to capital flight pressure The central bank has to raise interest rates to attract capital inflows, and high interest rates limit investment. From 2000 to 2015, the fixed capital formation rate in Brazil was highly negatively correlated with the real effective exchange rate, and the exchange rate depreciation reduced the capital formation rate. More seriously, the exchange rate “fear of floating” has caused Brazil to have a tendency to raise interest rates, the monetary policy space has been narrowed, and exports and investment have been damaged. Brazil’s manufacturing industry is concentrated in low- to mid-end production and exports. From 2001 to 2016, the proportion of Brazilian high-tech product exports in manufactured goods exports fell by 5.8 percentage points, from 19.25% to 13.45%, and in 2011 and 2013, the indicator was even lower than 10%.

Finally, economic liberalization has led to a boom in consumption on the basis of the expansion of foreign debt in Brazil, and the expansion of imports has caused restrictions on domestic manufacturing production. Prior to the opening of trade, the non-tradable sector in Brazil was able to obtain a more favorable development environment due to government protection and freedom from competition from abroad. After the opening of trade, the overvalued exchange rate promoted domestic demand in Brazil, and a large number of foreign-produced high-tech manufactured goods entered Brazil, which seriously eroded the market of domestic similar products. This has led to changes in the production structure and trade structure of Brazil, the import of machinery and equipment and complex parts, and the concentration of domestic production to simple components. As a result, the extent of Brazil’s embeddedness in the international value chain has gradually declined, and domestic industry has been rapidly reversed. From 2000 to 2015, the proportion of Brazilian industry in GDP was highly negatively correlated with the import penetration rate of Brazilian industry. The correlation coefficient reached -0.8, and the negative correlation between the proportion of manufacturing in GDP and the import penetration rate of manufacturing industry even reached -0.9.

Therefore, after economic liberalization, Brazil’s short-term economic policy is based on price stability. Under the inflation target system, interest rates are the only monetary policy tool. In order to control inflation, there is an upward bias in interest rates, and the real exchange rate is overvalued. Interest rates and exchange rates affect the capital formation of the manufacturing sector in terms of supply. On the demand side, economic liberalization opened up the market, and Brazilian manufactured goods lost in competition with foreign homogenous products. Foreign high-tech manufactured goods entered Brazil to replace domestic production, making Brazil’s domestic manufactured goods Reduced demand. The above two changes are not conducive to Brazil’s technology catch-up, the result is the shrinking of Brazil’s industry and manufacturing, “de-industrialization” and “de-manufacturing.”

Institutional suitability and development path

In the first half of the 19th century, major Latin American countries declared independence and were the first developing economic group in the world to embark on the path of capitalist development. The economies of these countries are generally fragile, and their dependence on developed economies in Europe and America is serious. Development strategies and institutional choices are also marked by the imprint of advanced economies. Under the guidance of the United Nations Economic and Social Commission for Latin America (ECLAC) under the structural theory of “central-periphery” theory, Latin American countries have adopted an import substitution industrialization strategy for too long, delaying the timing of transformation, and providing neoliberal access to Latin America. convenient. Since then, Latin American countries under the guidance of the “Washington Consensus” have reformed, opened up the market, reversed the recession brought about by the debt crisis, and the economy resumed growth. In the economic reforms that began in the 1990s, Latin American countries have also followed monetary policy and adopted inflation targeting. However, while being more integrated into the global economy, Latin American countries have also deepened their reliance on the global economy, especially in response to fluctuations in international financial markets. From the perspective of institutional suitability, neglecting the relevant systems blindly from developed countries as the particularity of emerging economies is a deep-seated reason for their loss again on the road of development.

The development of Brazil since the 1990s shows that the marketization and economic liberalization reform under the guidance of neoliberalism, although helping Brazil achieve economic stability in the short term, failed to achieve long-term development and failed to help Brazil complete its modernization. . Brazil achieved economic stability after the implementation of the Real program, and at the turn of the century, it stabilized domestic expectations by allowing exchange rate fluctuations and inflation targeting, and achieved success in the short term. However, for emerging economies including Brazil, the particularity of the domestic economic structure and the “periphery” of the international economy for a long time are greatly affected by international shocks and there is pressure for long-term exchange rate overvaluation. This is because Brazil has been affected by long-term inflation for more than half a century, and price stability has always been at the heart of economic policy. Although the inflation target system is implemented, unlike the developed countries, Brazil has to balance the inflation rate with the exchange rate stability, which leads to the “abnormality” of its inflation-targeted monetary policy. On the other hand, long-standing currency mismatches and maturity mismatches in Latin American countries such as Brazil have led to instability in their financial systems and frequent exchange rate fluctuations. For example, data from the World Bank show that in the fourth quarter of 2018, Brazil’s foreign currency-denominated external debt totaled $513.425 billion, while the local currency-denominated external debt was only $152.352 billion. Whether it is denominated in local currency or foreign currency, long-term debt ratio is over 90%. The particularity of the debt structure makes the influence of exchange rate fluctuations magnified. Therefore, the central bank had to intervene in the foreign exchange market in order to stabilize prices.

As an emerging economy, Brazil has a greater inflationary pressure than the initial conditions of the developed countries’ inflation targeting system. The inflation rate is far from the steady-state value and the inflation inertia is strong. Although countries with inflation targeting systems, including developed countries, will include exchange rates in the formulation of monetary policy, the exchange rate-price transfer coefficient of developed economies is low, and exchange rate depreciation is a new economy like Brazil. The effect of body inflation is large. Brazil’s financial market development is incomplete, macroeconomic policies are less effective, and debt is more dollarized. In addition to the procyclicality of capital flows, there will be a reversal of international capital. The Central Bank of Brazil will use the method of raising interest rates to stabilize the exchange rate, causing market expectations to be broken, and the credibility of the central bank to peg the inflation rate is impaired. In addition, the history of hyperinflation in Brazil has caused Fiscal Dominance in the country: the government’s income base is limited, the monetary policy of domestic currency is high; the public sector tends to borrow from the central bank and the financial system; domestic finance The market is not fully developed, there is a certain degree of financial repression, and the sustainability of public debt is not high. Therefore, the independence of the central bank will be affected. Under the inflation target system, the central bank mainly uses interest rate instruments to achieve monetary policy objectives. When the inflation rate rises, the central bank raises interest rates, which will increase the government’s public debt interest and increase debt expenditures. The result is an increase in fiscal deficits and an increase in inflationary pressures. Higher interest rates will also cause exchange rate appreciation, increased imports, and reduced exports. After the change in imports and exports, the current account deficit increased, the balance of payments required capital inflows to make up for the current account deficit, and the high demand for capital on the rate of return caused further interest rates.

Luiz Carlos Bresser-Pereira, who served as Brazil’s finance minister and proposed the “Bresser Plan”, pointed out that Latin American countries under the influence of neoliberalism have fallen into “new macro development”. The trap is mainly characterized by long-term interest rate growth above the international average and long-term overvaluation of the exchange rate. For Brazil, the inflation targeting system actually formed a fiscal problem, that is, the result of the upward bias of interest rates is the further expansion of the government debt scale and the rise of the risk premium. Under the open economy, due to concerns about the sustainability of Brazilian public debt, capital flight, the Real depreciated further. In order to prevent the depreciation of the Real, the central bank has to push up the inflation rate through exchange rate-price transmission, and has to continue to raise interest rates and form self-reinforcement. The result is that interest rates are constantly being raised, domestic credit is shrinking, investment confidence is steadily weakened, and the share of industry in GDP is declining. In fact, for Brazil, high domestic interest rates make it difficult for companies to meet their funding needs, especially for private companies that lack funds. For example, during the global financial crisis (2008-2009), private banks in Brazil (both domestic and foreign) almost stopped lending to private companies, 83% of private companies’ credit came from state-owned banks, and Brazil’s national economic and social development. Banks (BNDES) account for one-third of them.

The future of Brazilian manufacturing

The facts show that Brazil still has a deficit in high-tech manufactured goods, that is, Brazil is also a net importer of capital goods. In the process of moving from middle income to high income, Brazil experienced premature “de-industrialization”, which caused its economic catch-up process to stagnate and even reversed its development. Although “de-industrialization” is the common destiny of national development and the inevitable process of economic structure rationalization, the global “re-industrialization” trend after the global financial crisis has caused Brazil to rethink its industrialization process. At present, the world has entered the period of industrial chain and value chain reconstruction. The developed economies have attached more importance to the real economy. They have adopted the “re-industrialization” strategy and the formulation of international economic and trade rules to attract high-end manufacturing to return and promote the service industry value chain and The manufacturing value chain is integrated to strengthen competitive advantage. As a result, it is more difficult for industries in emerging economies outside the world economy to climb to the higher end.

For Brazil, which is “outside” in the global economy, the “manufacturing return” of developed economies will undermine the original international trading system, while Brazil, which has a low manufacturing competitiveness, faces enormous challenges in its manufacturing upgrades. It should be emphasized that Brazil’s industrialization has not been the result of its active choice. Although successive governments have emphasized industrial production capacity and the fundamental position of manufacturing in the Brazilian economy, manufacturing has never been the primary goal of the government in macroeconomic management. As early as after the Second World War, Brazil began to establish an industrial sector of the whole industry through import substitution industrialization, which also played a key role in the subsequent industrialization process, but this is not a clear and conscious concern of the government for industrial development. It is just a matter of expediency to resolve internal and external imbalances. In the 21st century, although President Luis Inácio Lula da Silva and the Labour Party criticized the former government of Fernando Enrique Cardoso, claiming that his successor was a “terrible legacy,” The two governments have maintained complete agreement on economic policy. The Lula government has taken advantage of the price stability achieved by the Real program and the relative calm of the international financial market to ensure macroeconomic stability. Although there are times when, in particular, President Lula’s second term, there is a proposal for a development plan or a new industrial policy, economic stability is undoubtedly a priority for the government. Since then, President Rousseff has also tried to break the bondage of the Brazilian economy in the first term of the “trinity” macroeconomic policy framework, but it is also forced by fiscal pressure and high interest rates.

At present, the global “re-industrialization” has arisen. Developed countries hope to revitalize the manufacturing industry and strengthen the real economy. Emerging economies hope to upgrade the manufacturing industry and complete industrial transformation and modernization. However, emerging economies should pay particular attention to the fact that the “re-industrialization” of developed countries is not to regain traditional manufacturing, but to create new technologies and industries to enhance the overall competitive advantage of industry and realize the restructuring of industrial chain and value chain. . In such a big environment, Brazil’s “re-industrialization” has a long way to go. On the other hand, the deep recession in 2015 and 2016 for two consecutive years and the slow growth in 2017 and 2018 actually reduced the inflationary pressure in Brazil, and the space for monetary policy expanded. This is an important opportunity for Brazil to develop new industries and promote the development of high-tech industries. If Brazil can achieve independent innovation through technology introduction and strengthen industrial agglomeration, thereby increasing the productivity of the manufacturing industry, it will produce sustainable growth and structural transformation of the Brazilian economy. positive influence.