Over the past fifty years, very few countries have successfully progressed from lower-income status to developed status. This very short list includes Korea, Taiwan, and the island city-states of Hong Kong and Singapore. We can also add coastal China, the extraordinary case of the past decades. These countries all have followed the model pursued by the United States, Germany and northern Europe, which was prescribed by the first Treasury Secretary of the United States in his seminal “Report on Manufacturers.”
Hamilton asserted that no country would prosper without a strong manufacturing sector, and noted that case for free-markets made by Great Britain was self-serving, to preserve its hegemony.”
In defense of trade tariffs, Hamilton argued that:
“There is no purpose to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry; no consideration more valuable, than a permanent addition to the general stock of productive labor.”
Every successful country has followed this mantra. The “Asian Model” espoused by Japan, Korea, Taiwan and China, has relied intensively on manufacturing. The “ China 2025” industrial policy, which has annoyed the current hegemon, the United States, takes to heart Hamilton’s focus on “new and useful branch of industry” by focusing government support on frontier industries. In addition to targeting subsidies for industry the “Asian Model” prescribes the following:
· The promotion of competition in manufacturing, with prioritization of exports.
· Competitive currencies. (This has always been important but now more than ever in a world of low-cost container shipping and erratic capital flows.)
· Create conditions for small farmers to thrive.
· Channel agricultural surpluses and savings into productive investments by regulating lending by financial institutions.
The resilience of manufacturing promoted by the Asian Model is in sharp contrast to the “Latin American Model.” The result can be seen in the following chart. Brazil has essentially abandoned its manufacturing sector and faces a crippling state of premature deindustrialization. Mexico has done much better than Brazil, but has focused, almost exclusively, on serving as a “workshop assembly line” for the U.S. market, with little value added.
Brazil gave up on its industrial model in the 1980s. Since then, it has essentially followed policies that are the antithesis to the “Asian Model.” Unlike in Asia, where export-competitiveness was stipulated, Brazilian industry lost support because of a reputation for high costs and poor quality. Brazil’s foreign currency management has also been incongruous, leading to extreme volatility in the exchange rate and a persistent tendency for overvaluation, conditions that are unbearable for the manufacturing sector.
Furthermore, the Brazilian policy framework has promoted an oversized financial system which thrives on speculation, and serves almost no purpose in funneling savings into productive activities. The past ten years have seen the logical culmination of this process, as debt levels have exploded at a time of extremely low investments in productive activities.
The current conditions in Brazil don’t look propitious for a major change of course. For the short term investors can hope only for some progress in terms of current government initiatives to reduce the excessive cost of government bureaucracy, simplify the tax system and deregulate several industries to encourage more investment. None of this can solve the structural issues that the country faces, particularly the excessive debt levels
If the current Brazilian model has run its course, what lies in the future? What could a new Brazilian development model look like?
1. First, the country will have to address excessive debt levels. Current debt levels asphyxiate growth, so some form of financial repression is inevitable to brings levels back to sustainable levels.
2. Second, Brazil will have to stabilize its currency at a competitive level and convince markets of a long-term commitment to currency competitiveness.
3. Third, Brazil needs to credibly commit itself to a new industrial policy. This is a huge challenge because of a lack of confidence in policy makers, but it is imperative. Legislation should be passed to provide long-term support or several “frontier industries,” while encouraging a competitive environment and a priority for exports. I suggest three candidates:
- Renewable energy – Brazil is well-positioned to be a global leader in solar, wind, and bio energy. It has ample resources, a large market and already a solid industrial base.
- “Green” farming – Agriculture is the one sector where Brazil has maintained global competitiveness, and it is well positioned to meet global demand for ecologically-sound farmed products.
- Deep-water oil production – Brazil has huge deep-water oil fields that will provide demand for capital goods for decades to come. However, the poorly structured policies and inconsistency of previous efforts have undoubtedly left a bitter taste.
Very informative blog. Keep sharing more blogs like this.
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