Opinion – Samuel Pessôa: Lula and the naval industry

A few weeks ago, former President Lula tweeted: “We, in a short time, managed to create a competitive and powerful naval industry. Brazil could have one of the biggest naval industries in the world.”

In PT’s delirium, the dismantling of the naval industry would have been a conspiracy by the US State Department, in which former judge Sergio Moro would be an undercover agent, to destroy a nascent sector of our industry that threatened the commercial interests of the power of the North.

Is it not our problem? An IPEA report documents that the unit labor cost (ratio between labor costs and productivity) in the naval industry in Brazil is 11 times higher than in China and 5 times higher than in South Korea (page 53).

For such a huge difference in productivity, the government effort to develop the sector would only survive if there was a very fast learning curve for the industry. Otherwise, the fiscal cost of subsidies makes industrial development policy unfeasible. However, between the plan’s launch in 2004 and 2011, there were no productivity gains (see page 51 of the same report).

If, on the one hand, in seven years there were no productivity gains in the naval industry in Brazil, the South Korean experience shows, on the other hand, that a well-executed intervention for seven years, from 1973 to 1979, in the heavy industry can generate lasting results. See “Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea” by Nathan Lane.

In other words, the question about industrial development policies is much less about whether they should be done or not and much more about governance, that is, protocols.

The effort to rebuild the naval industry under Lula’s government would have had to have been preceded by careful study. It was necessary to have a thorough diagnosis of the reasons why the two previous experiences of ours — the JK government, in the 1950s, and the Geisel government, in the 1970s — did not work. It would also be necessary to have a careful diagnosis of the reasons for the successful development of the industry in Asia.

Thus, public policy for the development of a sector, if there is a political decision to do so, needs to be informed by successful experiences and learning from mistakes.

For example, for the development of the aeronautical industry in Brazil, there was an investment in a state-of-the-art teaching and research school at a higher level, ITA, the construction of a research center, CTA, which links the company with research base, and the company itself, Embraer.

The company started by producing small planes. Additionally, if it operated with the national content requirement that was in force for the naval industry, it would not be able to export. In short, Embraer is a company that participates in global value chains and, for this reason, is able to produce an aircraft of international and competitive quality.

Even if the policy is desirable, or even if there are reasons for adopting an industrial development policy for a specific sector, if the initiative is not well designed, we will only have wasted public and private money.

People who are enthusiastic about the topic of sectoral development policies —certainly not the case with the column— should be less concerned with publicizing their need and spend more time understanding what precautions need to be taken to make the policy work.