Nova (?) política industrial
* The so-called Productive Development Policy (PDP), the Brazilian Government new attempt of industrial policy was announced with great fanfare and heralded as a “turning point” for industrial development in Brazil. The program consists of a combination of tax breaks (roughly 0.3% of GDP) and BNDES (Development Bank) financing at even more advantageous conditions than usual, aiming at increasing investment from 17.5% to 21% of GDP between 2007 and 2010, as well as increasing the share of Brazilian exports in global trade from 1.18% to 1.25% over the same time period, helping reduce balance of payments vulnerability.
* However well-intentioned, my take is that it should do little to actually achieve these objectives. For a start, the program paid little, if any, heed to macroeconomic consistency, that is, the need to reduce government spending to actually allow investment to grow. Second, it creates additional monetary impulse in an already economy facing inflationary problems, which is curious, to say the least, if one recalls that the Central Bank is, at this point, actually moving in the opposite direction, i.e., removing monetary impulse. Finally, the program elects some 24 sectors as priority, which raises the obvious question: what is NOT a priority these days? Moreover, it did not explicitly address the market failures that the program should tackle, which makes me think that the only justification for industrial policy (correcting market failures) played no relevant role in the process.
* Hence I have no high hopes that this policy should actually play any meaningful role in accelerating long term growth. At the same time, the additional monetary impulse it creates plays against CB efforts to curb domestic demand growth, a factor that can increase to some extent the amount of tightening required to bring inflation back to the target path.
The new Brazilian industrial policy was announced this week, calling for tax breaks of about R$ 21.4 bn (US$ 13 bn) between 2008 and 2010, a value corresponding to roughly 0.3% of GDP/year. In addition to that, BNDES is expected to extend credit ranging from R$ 62.5 bn (US$ 38 bn) in 2008 to R$ 77.7 bn (R$ 47 bn) in 2010, supporting the elected sectors. While BNDES reference rate (the Long Term Interest Rate, TJLP) should, at least for the time being, remain constant at 6.25%, spreads should be reduced by 60 bps/annum.
In addition to giving a boost to specific sectors (more on that below), the program aims at increasing investment from 17.5% of GDP in 2007 to 21% of GDP in 2010, and also increasing the share of Brazilian exports in global trade from 1.18% in 2007 to 1.25% in 2010. Both objectives are commendable. My calculations suggest that every additional percentage point of investment relative to GDP may increase potential GDP growth by an amount ranging from 0.20% to 0.25% per year, meaning that such increase could enhance trend growth by something like 0.7% to 0.9% per annum, pushing it towards the 5% per year mark.
The increase in exports, in turn, is tantamount to tighter integration of Brazil in international markets, with positive consequences for economic competition and productivity growth.
That said, whereas the objectives are laudable, there are issues related to macroeconomic consistency that do not seem to have been properly addressed. For one, increasing investment from 17.5% to 21% of GDP requires (a) a decrease in private consumption (i.e., an increase of private savings); or (b) a reduction of government spending; or (c) an increase of the current account deficit; or (d) some combination of the elements above. Given that the program brings no measures to increase private savings (which, to be fair, no one really knows how to do), and no measures to reduce government spending, the only way left for financing additional 3.5% of GDP in investment would be the increase of the current account by the same amount.
To be sure, this is not really an issue for whoever thinks and implements industrial policy, since these are not the same people that run fiscal policy. Nevertheless, it is ironic that the very same government that frets about the current account deficit to the point of imposing IOF on fixed income inflows to weaken the currency, closes an eye to the process just described, and takes no steps to curb government consumption. The presentation of the program makes clear that maintaining low external vulnerability -- which some government circles identify with low current account deficits, if not surpluses -- is an objective of the policy, but it is difficult to reconcile this with the objective of increasing investment in the absence of a lower government spending.
In addition to that, the reduction in BNDES cost of lending is equivalent to an increase in the monetary impulse, given the sheer size of the bank (BNDES lending represents something like 17% total credit), precisely at a moment in which the Central Bank is moving in the opposite direction, that is, removing monetary impulse to reduce the speed at which domestic demand has been moving. Whereas it is hard to quantify the precise impact of BNDES “easing” on monetary conditions, it seems safe to assume that this should not make the Central Bank be less hawkish on monetary policy.
As for the priorities of the program, the sheer truth is that I am possibly not the person in the best position to evaluate each one the programs for each one of the sectors and industrial complexes that are supposed to benefit from industrial policy initiatives. That said, it did not escape me that the policy elected some 24 segments as priorities, which makes me wonder precisely what has been left out.
Moreover, I could not find in the documents any analysis that made explicit the market failures that would justify any help for, say, the sector of personal hygiene (are people not taking sufficient baths, so a shower subsidy would be in order?), or the auto sector (whose domestic sales and production are, respectively, up by 35% and 20% year-to-date).
In all, I do not expect much result of industrial policy in terms of actually increasing trend growth by a significant amount in the next 3 years (the program horizon), although some of the elected sectors can actually benefit from it. From a fiscal perspective, furthermore, the impact is small, raising little concern on the ability of the government to keep meeting the fiscal targets, even if they were raised to something like 4.5% of GDP. That said, the additional monetary impulse does not help the Central Bank job, and clearly does not contribute to reducing the amount of monetary tightening required to push inflation back to the target path.
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