State Intervention and Industrialization: The Origins of the Brazilian Automotive Industry HelenShapiro 1 Harvard University

In recent years state interventionhas fallen from favor among developmenteconomists and within policy-making institutions. Latin America in particularhas been singledout as a regionin whichyears of misguided import substitutionpolicies have led only to overly protected,inefficient industriesand mountainsof publicdebt. This thesisresurrects a successfulexample of statesectoral planning: Brazil'seffort to producemotor vehicles. Initiated in 1956,the autoplan was part of a generalimport-substituting development effort in whichthe industry was to play the role of leadingsector through its abilityto attractforeign capitaland technology and generate linkages. The planrestricted imports and forcedtransnational automotive companies to choosebetween abandoning the lucrativeBrazilian market and, with the assistanceof financial incentives, producingvehicles with 90-95% Brazilian-made content within five years. This entailedno small effort on the part of all concerned.Brazil had only the beginningsof an industrialbase and up until that point virtuallyall vehicles hadbeen imported. Steel production had begun nine years earlier and coffee still comprisedmore than 50% of the country'sexports. With the autoplan, Brazil entered uncharted territory: the worldof high-technologyconsumer goods with which it hadno directexperience and the know-how for which was in the hands of transnational firms. As the first Latin Americancountry to attemptdomestic production, Brazil couldnot benefitfrom the experienceof neighboringcountries. Moreover, there was little precedentin Brazil or the regionin negotiatingwith transnationalsin anymanufacturing activity. Previous foreign investment had beenrestricted largely to public utilities, railroads, and raw materials. Despite the intensificationof competitionoutside national markets between the large auto manufacturers,cross-national investment in productionfacilities was occurring only within Europe. Firms competedfor peripheralmarkets by exporting completevehicles or knocked-downkits which only had to be assembled. Productiontargets largely were achieveddespite these obstacles. By 1961,only sixyears after the plan'sinitiation, eleven firms were producing over 145,000vehicles with an averagedomestic content share of 93% by weightand 87% byvalue. Most of themajor players in theinternational auto industry,including Ford, General Motors, Volkswagen and MercedesBenz, participated.Production reached 280,000 by 1968and eight firms, all foreign controlled,remained, although only three were responsiblefor 89% of all

1Thisdissertation wascompleted inthe Economics Department ofYale University under the supervisionof William Parkerand Albert Fishlow.

BUSINESS AND ECONOMIC HISTORY, SecondSeries, Volume Eighteen, 1989. Copyright(c) 1989by the BusinessHistory Conference.ISSN 0849-6825. vehiclesproduced. This consolidationallowed some firms to attaineconomies of scaleand production costs approaching those in theU.S. Subsequently,the industryled theBrazilian "economic miracle" of 1968-1973with annualgrowth ratestopping 20%. Vehicleproduction approached one millionin 1988, almostone-third of whichwas exported.

Analytic Approach

The thesisevaluates Brazil's early experiment in sectoralplanning. It reviewsvarious analytic approaches to stateintervention and argues that their assumptionsabout the nature of the state or the economydo not apply. Moreover,this literature inadequately captures the interactionbetween the stateand the market. This separationof politicaland economic spheres has beenreproduced in the literatureon Brazilianmotor vehicles. Some authors creditgovernment policy for the industry'sarrival in Brazilas well as for its ultimatestructure. They give particular credit to the ExecutiveGroup for the AutomotiveIndustry (GEIA) for servingan indispensableplanning function [4]. Othersargue that firm entryand market fragmentation resulted from the oligopolisticallycompetitive strategies of theforeign companies, making policy, subsidies,and the institutionalenvironment of secondaryimportance [2, 3]. The thesisbridges this conceptual gap by situatingthe autoindustry withinthe larger context of Brazilianpolitical economy. The studystarts from the premisethat Brazil found itself in a second-bestworld in the 1950s. Its domesticeconomy was plaguedwith distortionsand was foreignexchange constrained. On a global front, it faced various industrieswhich were characterizedby economiesof scaleand barriersto entry. It in effect confrontedan oligopolizedindustrial structure in whicheconomic rents were not competedaway. The thesis goes beyond establishingthe existenceof market imperfectionsand the economicrationale for interventionand explicitly examinesthe nature of the Brazilianstate and its capacityto intervene effectively.Post-war development in Brazilwas not characterized by a MITI- typeplanning agency with direct allocationalcontrol of economicresources. Rather, the situationwas one involvingtransnational corporations with technologyand capital,on the one hand, and a riscallyweak state,with the governmentin powersupported by a populistcoalition, on the other. The decisionto rely on indirectincentives and foreign capital, as well as the final outcome,were determinedby the dynamicinteraction of thesetwo actors.

Results

The resultsof thisstudy show that the Brazilianstrategy was a success accordingto a varietyof criteria.The industrybecame relatively cost efficient by internationalstandards, especially in trucks.Internal prices began to fall by the mid-1960s. More surprisingare the resultswith respectto state financingof the autoplan. The subsidiesprovided to the industry,although substantial,were smaller than previously assumed? More important, taxes paid by the vehicleassemblers more than compensatedfor the indirect subsidiesthey received, even within the industry'sfirst five years. What can be observedfrom the datais a circularself-financing program: firms were givenindirect subsidies, and consumersreimbursed the governmentthrough productionand sales taxes. This represented a progressive tax on middleclass consumers.The shareof rentsaccruing to the firmsdecreased over time as theywere forced to lowerprices and an increasingtax bite wastaken by the state. The sectorthus became a significantsource of revenuefor a statewith limited sources of fiscal income. The data reveal a form of rent redistribution usuallyfound between peripheral states and transnational firms exporting raw materials. The evidencealso shows that the automotiveindustry had relatively highlinkage effects. It generatedthe developmentof newsectors to produce partsand intermediate inputs. Brazil'spolicy was successful in generatingthe productionexternalities of theindustry and increasing the capacityof the state to capturerents accruing to the firms,benefits which it wouldhave sacrificed had it continuedto importfrom the oligopolizedfirms. The policywas less successfulwith respectto preservingthe parts sectorfor domesticcapital. The establishmentof a Brazilian-ownedparts sectorwas a criticalcomponent of the developmentstrategy. It wasa means bywhich to directa portionof therents accruing from protection to domestic capital.The intrasectoral redistribution of resourcesbetween the transnational corporationsand local firms was expectedto strengthenthe Brazilian industrialsector and createa basisfor further accumulation.Nevertheless, the partssector (like the terminalsector) effectively came under foreign control, either throughvertical integration by the terminalproducers or through independentdirect investment.

Conclusions

A carefulstudy of the mechanismsof interventionreveals that GEIA andgovernment policy cannot take all the creditfor theseresults. They were due largelyto the nature of transnationalfirms, the Brazilianmarket, and characteristicsspecific to motorvehicles. First, the size of the market,which made a domesticindustry viable, coupled with globalcompetition in the industry,in and of themselveswould have eventually led to seriousinvestment projectsin Brazil. The financialincentives and market quotas,which guaranteeda nichein the market,may have increased the numberof initial entrantsby makinginvestment and survival feasible for marginalfirms, but onlyin the shortrun. Moreover,the initial inefficiencyand required resour.ce transfersresulting from low levelsof productionwere lessthan theywould havebeen in a smallercountry. Secondly, the represseddemand from the postwaryears, and the factthat automobileswere a luxurygood and relatively

2jos6Almeida's figures [1] are generally relied upon, but it appearsthat they were incorrectlymeasured, inelasticwith respect to price,allowed firms to passalong their high costs to consumers.This alsoallowed the governmentto imposea hightax incidence on vehicleswithout diminishing total revenues. This outcome was due to the fact that motor vehicles were consumer durables.The sameresults would not haveobtained had the policyinvolved an intermediategood such as steel. The structureof the industryis different, but mostimportantly, taxing such an importantmanufacturing input would have had much broader economic ramifications. This emphasison underlyingmarket forces is not meantto implythat GEIA and publicpolicy were irrelevant. GEIA's planningcapacity and the subsidiesprovided to the industrywere criticalfor risk reduction. The subsidiesnot only significantlyreduced the costof capitalinvestment, but guaranteeda returnif the marketdid not materialize.Moreover, the program establishedthe timing of the investment.Whether or not the firms would have investedon their own a decadelater is not the relevantpoint. The acceleratedinvestment schedule had totally different ramificationsfor Braziliandevelopment. Essentially, GEIA provideda crediblethreat in its bargainingwith the transnationalfirms, unusualin Brazil at that time. A firm'sfailure to investduring this initial period would have meant sacrificing the financialsubsidies and beingrelatively disadvantaged were it to enter the market at a later date. Yet GEIA cantake little creditfor theconsolidation of the industryin the mid-1960s.It is true that GEIA hadpredicted that after initialyears of governmentsubsidies, a winnowing-outprocess would occur: fewer firms would survive,economies of scalewould be attained,and costsand prices wouldfall. The shakeout of the industrydid not resultsimply from price competitionbetween firms, however, but from the economiccrisis of the mid- 1960s,the severityof whichwas policy induced. Furthermore,the end of represseddemand and the impositionof pricecontrols meant that firms could no longerpass along all of their costs--including taxes-- to consumers.Firms became more concernedwith increasedvolume and market share, and new formsof competition(of whichprice was only one) emerged. The Brazilianexperience shows that the firms' global strategyand industrialpolicies were not at oddswith one another but were complementary; the natureof internationalfirms and the particularcharacteristics of motor vehicleswere criticalto import substitution'ssuccess. The limits of this strategyare nowbecoming apparent, however, as Brazil confrontsa globally integratedindustry. Finally, the Brazilian experiencealso offers insightinto the more generaldebate on stateintervention. Ironically, opposing sides in that debate often draw ammunitionfrom the experienceof the East Asian newly industrializedcountries; where one sees the efficiency of themarket, the other seesthe effectivenessof stateplanning. As C.H. Wilsoncommented on the analogous"power versus plenty" debate, these conceptions are not mutually exclusivebut complementary. He arguedthat one must analyze the conditions whichgenerate the "fiscaldesperation" of Spain [5, p. 494], or the British fiscalismthat "seemedto movein parallelwith powerfulprivate and public interestand was lessevidently damaging to economicdevelopment ..." [5, 3O

p. 521]. In this spirit,the thesisinvestigates the interactionbetween state policyand economicfactors to understandbetter the conditionsunder which state intervention was successful in Brazil.

References

1. Jos6 Alineida,A implantaq•oda inddstriaautomobil/stica no Brasil (Rio de Janeiro: Funda•&oGet•lio Vargas, 1972). 2. Eduardo Augusto Guimaraes,Acumulaq•o e crescimentoda firma (Rio de Janeiro: Editora GuanabaraS.A., 1987). 3. , "Industry,Market Structureand the Growth of the Firm in the Brazilian Economy,"Ph.D. dissertation,University of London,1980. 4. Celso Lafer, "The PlanningProcess and the PoliticalSystem in Brazil: A Study of Kubitschek'sTarget Plan 1956-1961,"Ph.D. dissertation,Cornell University, 1970. 5. C.H. Wilson,"Trade, Society and the State,"Cambridge Economic History of Europe, Part/V (Cambridge: CambridgeUniversity Press, 1967). CONFERENCE PAPERS

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