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A WORLD BANK COUNTRY STUDY Public Disclosure Authorized BRAZIL Industrial Policies and Manufactured Exports . Public Disclosure Authorized ~~*, 1 Public Disclosure Authorized .. .. * o 1 . 1. - -, * Public Disclosure Authorized A WORLD BANK COUNTRY STUDY BRAZIL Industrial Policies and Manufactured Exports The World Bank Washington, D.C., U.S.A. © 1983 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing August 1983 All rights reserved Manufactured in the United States of America World Bank Country Studies are reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing mem- ber countries and of its dialogues with the governments. Some of the reports are published informally with the least possible delay for the use of governments and the academic, business and financial, and development communities. Thus, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. Any maps used have been prepared solely for the convenience of the readers; the denomina- tions used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. The full range of World Bank publications is described in the Catalogof World Bank Publica- tions; the continuing research program of the Bank is outlined in World Bank Research Pro- gram: Abstracts of Current S&udies. Both booklets are updated annually; the most recent edition of each is available without charge from World Bank Publications in either Washington or Paris (see the back cover for addresses). Library of Congress Cataloging in Publication Data Main entry uxíder title: - Brazil, industrial policies and manufactured exports. (A World Bank country study) Report of a mission to Brazil, July-August 1981, prepared by M. Pdf.alver, et al. 1. Brazil-Industries. 2. Brazil--Commercial policy. 3. Technology and state--Brazil. I. Penalver, M. II. World Bank. III. Series: World Bank country study. HC187.B86' 1983 338.981 83-12357 ISBN 0-8213-0156-X GI.OSSARY OF ACRONYMS BEFIEX - Comissao Para Concess&>o de Benef<cios Fiscais a Programas Especiais de Exportaçao (Special Program of Fiscal Incentives for Exporters) BNDE - Banco Nacional do Desenvolvimento Econômico (The National Bank of Econouiic Development) CACEX - Carteira de Comércio Exterior (Foreign Trade Department, Bank of Brazil) CDI - Conselho de Desenvolvimento Industrial (Industrial Development Council) EMBRAMEC - Empresa Brasileira de Industria Mecânica FINAM - Fundo de Investimentos da Amazônia (Amazon Investment Fund) FINAME - Agencia Especial de Financiamiento Industrial (Special Agency for Industrial Financing) FINEX - Fundo de Financiamiento àaExportaçao (Export Financing Fund) FINOR - Fundo de Investimentos do Nordeste (Northeast Investment Fund) FUNCEX -- FundaSao Centro de Estudos do Comercio Exterior (Center of International Trade Studies) IBGE - Instituto Brasileiro de Geografia e Estat(stica (Brazilian Institute of Geography and Statistics) 1CM - Imposto Sobre Circulagao de Mercadorias (State Value added tax) IPI - Imposto de Produtos Industrializados (Federal Industrial Product Tax) ISIC - International Standard Industrial Classification NBM - Nomenclatura Brasileira de Mercaderias (Brazilian External Trade Classification) SUDAM - Superintendência do Desenvolvimento da Amazonia (The Superintendency for the Development,of the Amazon Region) SUDENE - Superintendgncia do Desenvolvimento do Nordeste (The Superintendency for the Development of the Northeast) BRAZIL INDUSTRIAL POLICIES AND MANUFACTURED EXPOTrS TABLE OF CONTENTS Page No. INTRODUCTION ..................... .. r,r......... .... i-ii SUMMARY AND CONCLUSIONS ....................... ....... ......... - xv PART I MANUFACTURING PRODUCTION AND EXPORT PERFORMANCE I. ORIGINS AND RECENT PERFORMANCE OF THE MANUFACTURING SECTOR The Origins of Brazilian Industrialization ............ 1 Industrial Development After 1945 ....... ............ 2 The Stabilization Program of 1964-1967 ........ 3 Brazilian Manufacturing in the 197Os ....... 4.......*O 4 Overall Performance ......... ............... ......... 4 II.* STRUCTURE OF MANUFACTURING Output and Value Added ...... .....* ..*. 8 Investment and Ownership ... ....... ............... 9 Employment and Productivity ....... 12 Industrial Location and Regional Development ............. 19 Incentives for Regional Industrialization .... 20 Performance of the Northeast and the North Regions ....... 20 III. MANUFACTURED EXPORTS PERFORMANCE 22 Introduction .......... , , . ...............e.e.e..e.e...e. Structure of Manufactured Exports .......... ....... 24 Export Orientation of Industry ........ ...................* 28 Internal Constraints to Manufactured Exports Growth ...... 30 External Export Constraints ****s@****...... .. 32 Prospects for Manufactured Exports ...... 33 IV. SOURCES OF INDUSTRIAL GROWTH: IMPORT SUBSTITUTION AND EXPORT EXPANSION Introduction 34 Previous Studies and Theoretical Framework .. 34 Sources of Industrial Growth in the 1970s 37 This report is based on the findings of a mission which visited Brazil during July/August 1981. The mission comprised Messrs. M. Penalver (mission chief) C. Dahlman, R. Incer and M. Reyes (all of the Bank), Mr. E. Bolte (UNIDO/WB Coop. Prog.) and Mr. W. Tyler (consultant). TABLE OF CONTENTS (Continued) PART II TRADE POLICY, PROTECTION AND COMPETITIVENESS OF BRAZILIAN INDUSTRY Page No. V. INDUSTRIATL POLICY OVERVIEW Introduction ........................................... 43 Policy Reactions to the Oil Crisis .. ..................... 44 Policy Changes After 1979 ............................. 46 The Stabilization Program of 1981 .......................... 47 Stabilization in the Domestic Market ................... 47 Stabilization in the External Sector ....................... 49 Export Incentives and Import Restrictions .................. 50 VI. FISCAL AND FINANCIAL INCENTIVES TO EXPORTS Introduction ............................................ 53 Fiscal Incentives to Exports ........ ................... 53 Quantification of Fiscal Incentives ......................... 55 Aggregate Impact of Fiscal Incentives to Exports ....... 60 Financial Incentives to Exports ............................. 63 Quantification of Financial Incentives to Exports ...... 67 VII. PROTECTION AND COMPETITIVENESS OF BRAZILIAN INDUSTRY Introduction ........................................... 69 Effective Protection in the 1960s and Early 1970s ...... 70 Nominal and Effective Protection to Industry in 1980 . 73 Efficiency and Competitiveness of Industry ............. 79 VIII. INDUSTRIAL POLICY IMPACT AND FUTURE INDUSTRIAL STRATEGY Introduction ............................................ 82 Incentives to Exports and Domestic Sales ............... 82 Net Incentives to Exports and Production ................... 84 EffecLive Incentives to Exports ............................. 86 The Impact of Brazilian Trade Policy ........................ 87 Trade Policy and Industrial Strategy ........................ 90 PART III TECHNOLOGICAL DEVELOPMENT AND MANUFACTURED EXPORTS IX. TECHNOLOGY POLICY Introduction ........................................... 95 Development of Technological Infrastructure ............ 95 Regulation of Technology Imports ..................... c- 98 Development of Technological Capabil:ties at the Firm Level 101 Policies Affecting Demand for Domestic Technology ...... 104 The Impact of Technological Policy ..................... 107 TABLE OF CONTENTS (Continued) Page No. X. CAPITAL GOODS AND TECHNOLOGY EXPORT 109 Changes in the Structure of Br.Lziíian Exports ......... 110 Exports of Capital Goods t............................ 111 Exports of Di8embodied Tec'ino?l..gy , o................o 112 Main Exporters using Relativel-y Sophisticated Technology XI. EXPORT DEVELOPMENT IN THREE CAPITAL GOODS SUBSECTORS Introduction ........................................... 116 116 The Automobile Subsector ..... ................................ The Aircraft Industry . ........... #o.. ............ o 125 Heavy Capital Goods .............. .......... 130 ANNEXES 135 Annex 1 Estimation of Sources of Demand Growth ............. 137 Annex 2 Estimation of the Shadow Exchange Rate ..... Annex 3 Technological Development and Technology Transfers. 1970 Survey Results . .................. -. * 141 148 Annex 4 Statistical Appendix ................ .......... MAP INTRODUCTION This report summarizes the findings of a World Bank mission that visited Brazil in July/August 1981. The main purpose of the mission was to review Brazll's trade policy with respect to manufacturing industry and its impact on industrial efficiency and manufactured export growth. In addi- tion, a brief review of the main features of the manufacturing sector during the decade of the 1970s, including its structure and performance, was also prepared as background information for the review of trade policies in 1980 and 1981. The mission also reviewed the Brazilian experience with policies to promote and regulate the development and acquisition of industrial technology and their impact on output and exports. The report is organized in three separate parts. The

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