Opinion – Rodrigo Zeidan: Industrial policy cannot be guided by populism

“The equilibrium exchange rate for the industry should be over R$10,” said Ciro Gomes at the Brazil+China event, in Beijing, in 2017, when the dollar was at R$3.31. But does industrial policy really work? The answer, as so often in economics, is: it depends.

There is evidence that industrial policy works in accelerating a country’s development (but alone, it doesn’t do any good). But in Brazil, it is a disaster, serving only to transfer income from the poorest to the pockets of the shareholders of the country’s large companies. When a businessman overhears a politician promising to boost his industry, he calls his realtor to book yet another apartment in Miami.

There are three conditions for industrial policy to contribute to society: that industry protection is well designed, that the chosen sectors are dynamically competitive, and that support is temporary. A large part of Brazilian industrial policy over the last 60 years fails in all three criteria.

Roughly speaking, there are three options for designing industrial policy: closing the domestic market through high import tariffs, subsidizing local producers (preferably with direct subsidies) and doing both at the same time.

We’ve known for decades which of these options is the best: subsidizing local production, but without limiting imports. The reason for this is simple: as local consumers have the option of buying imported products at the same price as in the rest of the world, local producers would necessarily need to create competitive products with the money received by the state. Also, direct subsidies are budget expenditures. If the State is going to take money from society to put in the hands of a few companies, let it do so in a transparent manner.

If there are no resources for these subsidies, the best choice is tariff protection, but without State subsidies. With imports limited or zeroed by high tariffs, national companies would compete for the domestic market. The worst option, by far, is the combination of subsidies and protection from international competition: local companies smear themselves with public resources and deliver bad products.

Is it any surprise to anyone that our industrial policy was the last and worst option? And, to put the icing on the cake, national businessmen use part of the resources diverted from the poorest to lobby and convince the population that this excrescence of the status quo benefits society. Left and right, we have politicians who defend the “national interests” (of American homebuilders in Florida).

Regarding the choice of sectors to receive public resources, the ideal is that they are exporters or with the potential to do so. In Brazil, we do the opposite: we try to substitute imports with local products, which is much more risky and does not create a transparent way to measure the success of the policy, which would be the value exported by the sector. What happens? Recurring lobbying of entrepreneurs to “protect jobs” (from US contractors).

China protected the auto industry in the 1950s, as did the Democratic Republic of Congo. Senegal put a significant portion of GDP on truck assemblers in the 1960s, and Zambia did in the following years. These countries have abandoned it.

If it is to do industrial policy (this is another discussion), it is to do it right. It’s in Brazil? When will we learn?