The BRAZILIAN ECONOMY Economy, politics and policy issues • APRIL 2012 • vol. 4 • nº 4 FGV A publication of the Getulio Vargas Foundation

Interview Ozires Silva – former CEO of Embraer Politics and infrastructure minister, "The quest Not (yet) a political crisis. for global competitiveness"

Roundtable Rethinking the future of agriculture

Viewpoint The persistent apathy of industry

Economy IBRE April economic outlook

The government is policy to make

betting on an agressive protectionistBrazilian industrial industry how thateffective will be. more competitive, but opinion is divided on F O U N D A T I O N

The Getulio Vargas Foundation is a private, nonpartisan, nonpro- Economy, politics, and policy issues fit institution established in 1944, and is devoted to research and A publication of the Brazilian Institute of teaching of social sciences as well as to environmental protection and sustainable development. Economics. The views expressed in the articles are those of the authors and do not necessarily represent those of the IBRE. Reproduction of the Executive Board content is permitted with editors’ authorization. President: Carlos Ivan Simonsen Leal Letters, manuscripts and subscriptions: Send to Vice-Presidents: Francisco Oswaldo Neves Dornelles, Marcos [email protected]. Cintra Cavalcanti de Albuquerque, and Sergio Franklin Quintella. Chief Editor Vagner Laerte Ardeo IBRE – Brazilian Institute of Economics The institute was established in 1951 and works as the “Think Managing Editor Tank” of the Getulio Vargas Foundation. It is responsible for Claudio Roberto Gomes Conceição calculation of the most used price indices and business and consumer surveys of the Brazilian economy. Senior Editor Director: Luiz Guilherme Schymura de Oliveira Anne Grant Vice-Director: Vagner Laerte Ardeo Assistant to the Editor Louise Ronci Directorate of Institutional Clients: Rodrigo de Moura Teixeira Editors Directorate of Public Goods: Bertholdo de Castro Vagner Laerte Ardeo Claudio Accioli Solange Monteiro Directorate of Economic Studies: Márcio Lago Couto Art Editors Directorate of Planning and Management: Ana Elisa Galvão Vasco Medina Coeli Marcelo Utrine Sonia Goulart Comptroller: Célia Reis de Oliveira Contributing Editors Kalinka Iaquinto – Economy Address João Augusto de Castro Neves – Politics and Foreign Policy Rua Barão de Itambi, 60 – 5º andar Thais Thimoteo – Economy Botafogo – CEP 22231-000 Rio de Janeiro – RJ – Brazil IBRE Economic Outlook Tel.: 55 (21) 3799-6799 Coordinators: Regis Bonelli and Silvia Matos Email: [email protected] Web site: http://portalibre.fgv.br/ Team: Aloísio Campelo André Braz Armando Castelar Pinheiro Carlos Pereira Gabriel Barros Lia Valls Pereira Monica de Bolle Rodrigo Leandro de Moura Salomão Quadros IN THIS ISSUE 3 The BRAZILIAN ECONOMY

5 10 26 20 Ne w s Br i e fs competitive, but opinion is divided units of the Getulio Vargas Foundation 4 Unemployment, wages, and manu- on how effective that will be. Claudio presented the first Roundtable on the facturing output are up … external Accioli interviews experts and reviews Agribusiness Scenario, and experts trade surplus sets record … President some of the history of industrial policy; there identified problems Brazil’s agri- shuffles government leaders in Con- that history is not promising, the risks culture sector must deal with to ensure gress … Aircraft maker Embraer is are high, and although the experts that it retains its current global promi- doing business in Africa … financing may disagree about how effective nence. Thais Timotheo reports on impli- agreed on for machinery exports to protectionism will be, they generally cations for Latin America as a whole Peru … Mexico comes round on auto agree that what is really needed is to and analyses a case of new agricultural exports … BRICS insist on more say improve the business environment. technology from Monsanto. in the IMF … tax on foreign borrow- ing extended … stimulus package In t er v i e w Vi e w p o i n t announced for industry. 20 The quest for global 37 The persistent apathy of competitiveness industry Po l i t i c s Ozires Silva, former Minister of Infra- “When the economic situation is 8 Not (yet) a political crisis structure, former president of Embraer satisfactory but industry is not going Is President Rousseff facing a gov- and Petrobras, and now dean of so well, what should we do?” Luiz ernability crisis with her coalition Monte Serrat University, has seen Guilherme Schymura asks. The answer, allies? Probably not, at least not yet, where Brazilian business fits into the he says, is that “Since industry is apa- says João Augusto de Castro Neves. world economy from every possible thetic, the world economy is uncer- Though the Senate rejected one of her angle. He explains to Claudio Accioli tain, and bringing about devaluation is nominations and a very small political how Brazil can engage effectively in difficult, we should therefore move to party pulled out of the coalition, the the tough competition imposed by address the ‘Brazil cost.’” problems are more symbolic than real. emerging Asia, especially China and South Korea. With approval ratings and economic Ec o n o m y indicators on her side, President Rous- 39 IBRE April economic outlook seff is retaining political capital. But for Ro u n d ta b l e The Brazilian economy is recover- how long? 26 Rethinking the future of ing, but more slowly than expected. agriculture Low inflation, high employment, and Cov er St o r y The OECD says world food supply will income growth are promoting recov- 10 Made in Brazil need to increase 20% in 10 years to ery, but lack of dynamism in industry The government is betting on an meet demand, and expects that Brazil- and an expected slowing down of aggressive protectionist industrial ian agriculture will have to contribute purchases of durable goods will act as policy to make Brazilian industry more about two-fifths of that. In March, two a brake.

April 2012 Ÿ The Brazilian Economy 4 BRAZIL NEWS BRIEFS

ECONOMY POLITICS Unemployment and wages up in 2011 and the best result for the month President shuffles government February since 2007, according to the Ministry leaders Brazil’s unemployment rate rose to 5.7% of Development, Industry and Foreign President Dilma Rousseff ousted her from 5.5% in January, the government Trade. Both exports, at US$21 billion, floor leaders in both houses of Congress statistics agency IBGE announced. and imports, at US$19 billion, set new in a move seen as an effort to quell signs However, February’s jobless number records. (April 2) of unrest within the governing coalition. was the lowest for the month since Sen. Romero Juca of the Democratic Manufacturing output up in 2002, indicating that the Brazilian labor February Movement Party (PMDB) and Rep. market was largely unaffected by the Industrial production grew 1.3% in Candido Vaccarezza of the Workers’ Party country’s economic slowdown in the February, after falling 1.5% in January, (PT) stepped down so that the president second half of 2011. Wages adjusted for according to seasonally adjusted IBGE could introduce rotation of the posts, inflation rose 1.2 percent from January data. Compared with February 2011, which are the administration’s main to R$1,699 (US$931)—4.4% more than a however, production fell by 3.9%, the points of contact with each chamber. year earlier. (March 22) sixth consecutive decline. So far in 2012 The PMDB’s Sen. Eduardo Braga replaces External trade surplus highest the industrial sector is down by 3.4%. Juca and the PT’s Rep. Arlindo Chinaglia replaces Vaccarezza. According to Rep. since March 2007 (April 3) Exports exceeded imports by US$2 Jeronimo Goergen (government-allied Inflation lower in March billion in March, up 30% over March Progressive Party), “It’s no use changing Brazil’s official consumer price index the leaders or ministers … because they rose 0.21% in March, slowing from a TRADE will always require authorization from 0.45% rise in February mainly because President Rousseff for everything they BNDES and Interbank finance inflation was lower for all items but food do. This is a general complaint among machinery exports to Peru and transportation. (April 5) members of the coalition.” (March 15) On March 12 the National Bank for Economic and Social Development (BNDES) and the Banco Internacional Del DEFENSE Perú S.A.A. (Interbank) signed a contract Embraer supplies aircraft to turboprops: Burkina Faso, Angola, to finance Brazilian exports of machinery African nations and Mauritania. Total value of the and equipment to Peru. A line of credit Embraer Defense and Security has contracts—which include an extensive up to US$50 million was established. signed contracts with three African logistical, training, and replacement The partnership between the BNDES nations to acquire its A-29 Super Tucano parts package—is more than US$180 and Interbank will promote trade light attack and advanced training million. (March 28) between Brazil and Peru and present new opportunities for their financial cooperation. (March 13) Mexico bows to Brazilian pressure

on auto exports Photo: Embraer Mexico has agreed to reduce its auto exports to Brazil to an average of about US$1.6 billion over the next three years, bowing to Brazilian concerns about its ailing industrial sector. Mexican car exports to Brazil jumped by around 70 percent in 2011, aggravating a glut of cheaper imported autos in Brazil. The quota is the latest in Brazilian government efforts to protect the industry. Free trade between the two nations will resume after three years. However, the accord fell far short of what Mexico said it would fight for, and prompted harsh words from Mexican free trade advocates. (March 15) A-29 Super Tucano light attack and advanced training turboprop.

April 2012 Ÿ The Brazilian Economy BRAZIL NEWS BRIEFS 5

FOREIGN POLICY

BRICS demand better representation at the IMF Leaders of the world’s most powerful emerging economies have threatened to withhold financing that the International Monetary Fund has requested to fight the European sovereign debt crisis unless they gain more voting power at Photo: Roberto Stuckert/ABr. the IMF. Shareholders agreed in 2010 to shift more IMF voting weight toward emerging nations. However, the U.S. has not yet passed enabling legislation. Meeting in India, heads of state from Brazil, Russia, India, China, and South Africa said there was an urgent need for the IMF to “better reflect economic Presidents Dilma Rousseff (Brazil) and Dmitri Medvedev (Russia), Prime Minister Manmohan Singh (India), and Presidents Hu Jintao (China) and Jacob Zuma weights” and “enhance the voice and (South Africa). representation of emerging market and developing countries … The ongoing implement the 2010 reform faithfully.” Rousseff charged that western countries effort to increase the lending capacity of The BRICS leaders also criticized had caused a “monetary tsunami” by the IMF will only be successful if there is western countries for their handling of adopting aggressive expansionist policies confidence that the entire membership the global economy in the aftermath that are undermining the competitiveness of the institution is truly committed to of the financial crisis. President Dilma of emerging economies. (March 30)

ECONOMIC POLICY

Brazil cuts taxes, boosts financing for industry To aid industry the government has announced a stimulus package of US$35 billion (1.5% of GDP) that reduces

Photo: Wilson Dias/ABr. payroll taxes and social contributions, increases funding for state development bank (BNDES) subsidized loans, and raises import taxes. Separately, Finance Minister Mantega pledged to take additional measures to stem currency appreciation. (April 3) Largest February primary budget surplus posted In February Brazil posted the largest primary budget surplus (excluding President Rousseff anounces new measures to support domestic industry. interest on public debt) since data collection began in 2001, a response Brazil extends tax on foreign Brazilian companies issue bonds for to the government’s efforts to rein in borrowing foreign loans. The Rousseff government public spending and bring interest rates By presidential decree, Brazil extended is concerned that foreign cash flows into down. The consolidated primary budget the application of a 6% tax on foreign domestic financial markets could force surplus was R$9.5 billion (US$5.2 billion). borrowing to debt with maturities of up appreciation of the Brazilian currency, In the 12 months through February, to five years, rather than the two-year derail a feeble recovery, and further the primary surplus was equivalent to maturity limit that prevailed through suppress industrial competitiveness. 3.3% of GDP, unchanged from January. February. The tax is charged when (March 12) (March 30)

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here’s an old saying that insanity is having their hands out. To find the fruits doing the same thing over and over and of corruption, we simply need to follow the Teach time expecting different results. money—and there’s a lot of money at stake And isn’t that what the new industrial policy in these protectionism measures. is doing with its protectionist measures? The bigger problem of the new industrial As our cover story points out, between policy, though, may simply be that 1998 and 2008 Brazil had a policy of protectionism encourages inefficiency, protecting the information technology and discourages company investment. As industry. How successful was it? Well, for Pedro Cavalcanti asks in the article, “How the individual companies that benefited, many years are necessary to protect certain productivity went up significantly and so industries? 20? 30? And who pays for the did their investment in R&D. Yet at the loss of productivity during all this time?” end of a whole decade, 26 countries still We know the answer to that question: again, outran ked Brazil in I T competitiveness — ou r taxpayers. Or maybe more precisely, domestic position in the global market hadn’t budged consumers, who in addition to supporting from 27th. badly run businesses as One of the interesting The bigger problem taxpayers must also pay twice aspects of the cover story is as much for what they need that not one of the independent of the new industrial because Brazilian products experts consulted thought policy, though, cost so much more to make protectionism was a good may simply be than the imports to which idea. Only those affiliated the government has barred with the government came that protectionism the door. to the defense of the concept. encourages Another question is And even they recognized inefficiency, and whether protectionist policies that Brazilian industry has are simply a way to keep dying serious structural problems discourages company businesses on life support that protectionism won’t investment. when the kindest thing to solve. That’s not even taking do for all of us would be to into account the essential unfairness of pull the plug. Does anyone remember the favoring some industry segments with Merchant Marine Fund in the late 1970s and incentives and not others. early 1980s? The fund financed an aggressive What no one seems to be considering policy to protect shipbuilding? And how either is the extent to which protectionism well did that work? In the 1970s, Brazil was could encourage corruption. President second in the world rankings behind Japan. Rousseff has already made the fight against Then the fund ran out of money. Today, corruption a hallmark of her administration. South Korea and China are the world’s top Yet in expanding grants and granting tax shipbuilders with Japan coming in third. breaks for certain industries—so that in Brazil’s shipbuilding industry has simply essence the taxpayer is subsidizing those disappeared. industries—isn’t the administration also In certain carefully constructed scenarios, creating incentives for corruption? It isn’t with time limits and benefits phased out over hard to see the lobbyists converging on our time, protectionism can achieve its objectives. representatives, many of whom already have Unfortunately, Brazil has once again failed to a somewhat grubby reputation for regularly construct its industrial policy carefully.

April 2012 Ÿ The Brazilian Economy 8 POLITICS

Not (yet) a political crisis

Is President Rousseff facing a governability crisis with her coalition allies? Probably not, at least not yet. Though the Senate rejected one of her nominations and a very small political party pulled out of the coalition, the problems are more symbolic than real. With approval ratings and economic indicators on her side, President Rousseff is retaining political capital. But for how long?

João Augusto de Castro Neves, Washington D.C.

ince February, President Dilma In numerical terms, departure of the Rousseff has suffered two important PR hardly changes the balance of power Ssetbacks in Congress. On March 8 the between the government and the opposition Senate rejected her proposal that Bernardo in Congress. Not only will President Rousseff Figueiredo continue as head of the National still enjoy a comfortable majority in the Land Transportation Agency (ANTT), the Senate (without the PR the government still autonomous regulatory agency tasked with has 51 seats out of 81), but it is also doubtful, overseeing the government’s transportation despite the formal defection, that the infrastructure strategy. The setback sparked seven PR senators will close ranks with the a decision from President Rousseff to replace opposition. The PR left the coalition because the government’s leaders in both the Senate Rousseff would not allow them to nominate and the Chamber of Deputies. Then, on the replacement Minister of Transport, March 14 the Party of the Republic (PR) but the party is open to supporting the announced that it was leaving the governing government case by case. This could coalition in the Senate. allow the government to reestablish the Many media pundits are suggesting that relationship, or at least mitigate the risk of Rousseff may be facing a governability crisis overt opposition. with her coalition allies, but that appraisal is As for the Figueiredo rejection, although premature. The rejection of Figueiredo and it does not signal a full-fledged political the PR’s defection were certainly setbacks, crisis, it does highlight the government’s but their impact on governability should be relatively deficient coalition management. kept in perspective. [email protected]

April 2012 Ÿ The Brazilian Economy POLITICS 9

The main driver behind the rejection To protect itself from was dissatisfaction among Rousseff’s an eventual full-fledged allies, mainly the Brazilian Democratic Movement Party (PMDB), the largest party political crisis, the in the coalition, with the lack of space in administration sooner or the administration (i.e., its influence on government appointments). PMDB leaders later should rethink the feel that the party should control the more way it is managing the important ministries, or at least that it should have full control of the ministries it currently government coalition. holds. But ever since last year’s corruption scandals that affected several ministries, should be viewed as mere grumblings President Rousseff has taken a much more within a governing coalition where the hands-on approach, which includes vetting president still retains significant political second-tier positions in the cabinet. capital, and all the conditions necessary to So far the president has handled hold the coalition together are intact. dissatisfaction within her coalition without Ultimately, the impact on the near-term difficulty. High approval ratings, sound reform agenda should be limited to slowing economic indicators, and a severely the speed of legislative activity. Since there weakened opposition have given her the is a window of opportunity until the July political capital to squeeze her allies without recess and local elections will dominate the compromising the government’s reform second half of the year, the government is agenda. In fact, the PMDB purposefully chose likely to keep pushing for its reform agenda a not very crucial vote on which to manifest through the next few months. its dissatisfaction. Rousseff’s response to Nevertheless, to protect itself from an the threat, however, was to reshuffle the eventual full-fledged political crisis, the leadership in both houses of Congress—an administration sooner or later should rethink unusual maneuver when a legislature is in the way it is managing the government mid-session. Some believe her move was coalition. With approval ratings and meant to punish the rebellion, which could economic indicators on her side, President ultimately backfire. But it is more likely that Rousseff is retaining political capital and the strategy was meant to recalibrate her ignoring the basic rules of coalitional political coordination strategy and team, presidentialism, that is, to share power and which further concessions on her part could financial control. If those numbers change, confirm. The point is that these events it will be another story.

April 2012 Ÿ The Brazilian Economy 10 COVER STORY

April 2012 Ÿ The Brazilian Economy

COVER STORY 11

The government is betting on an aggressive protectionist industrial policy to make Brazilian industry more competitive. However, the history of Brazilian industrial policy raises doubts about how effective this will be—attempting to shield industry from competition may well backfire.

Claudio Accioli, Rio de Janeiro Today, in an unstable global economy a n d w it h i n c r e a s e d c o mp e t it io n wo rld w id e , iscussion of industrial policy has the government is returning to the policy a long history, starting with the of using laws, public funding, grants, DSecond National Development procurement or special arrangements to Plan (PND), which outlined Brazil’s promote national production and content industrial policy for 1974 through 1979. in the petroleum, shipbuilding, defense, Given the adverse global economic electronics, audiovisual, and automotive environment following the first oil shock, industries among others. As with any the PND set out an ambitious program of controversy, there is no consensus. For import substitution. Again, after the first, some, the policy is justified because protectionist, Information Technology industry is increasingly vulnerable Law was passed, the discussion heated and unable to compete, suffocated up: The law established a market reserve by the “Brazil cost” and by the flood for industry, preventing the import of imported goods stimulated by an of products and components in an appreciated exchange rate. For others, it attempt to defend national industry and is a setback, a regression to the past that encourage domestic scientific research. will only further disrupt the Brazilian Though the law was relaxed in the early industrial sector. 1990s, the debate about protectionist preferences was reignited after the PROTECTIONISM ADVANCES opening to car imports exposed the The Greater Brazil Plan launched last fragility of the Brazilian car industry, August was expanded this April with which barriers to entry had protected a package of incentives for industry to for years. increase national content and innovation

April 2012 Ÿ The Brazilian Economy 12 COVER STORY

Today, in an unstable global In the case of financing, the idea is to extend to other official banks the economy and with increased concept of the Finame program of competition worldwide, the the National Bank for Economic and Social Development (BNDES), granting government is returning to credit lines for purchase or production the policy of using laws, public of machinery and equipment that have national content of 60% or more. To this funding, grants, procurement or end, the BNDES coffers were reinforced special arrangements to promote with another R$45 billion to reduce the cost and extend the period for loan national production and content. repayments. As for utilities concessions, the MDIC plans to extend the 1999 model in the oil worth about R$60 billion (US$35 and gas segment in which the National billion, 1.5% of GDP). The package Petroleum Agency (ANP) requires bidders extends preferences in government to document in tenders a minimum purchases to medicines, pharmaceuticals, percentage of national content. biopharmaceuticals, and bulldozers The Greater Brazil Plan also gives tax produced domestically; creates the breaks for acquisition of local goods and National Broadband Plan (PNBL), services and for investments in research which exempts national equipment and development (R&D). The new and infrastructure investment in automotive regime grants automakers telecommunications networks from more exemptions from the industrial taxes; expands incentives for national product tax (IPI) if they increase the production of semiconductors; and domestic content of components. sets out a new automotive regime for 2013–2017. COMPUTER INDUSTRY For good or evil, the Rousseff Since for a long time protection efforts and administration has made “defense nationalization focused on information of domestic industry and markets” technology, that history allows us to an explicit goal. “We are seeking to assess how well protectionist policies implement the strategy as a way to work. In 2010 at the request of the leverage the current investment cycle Ministry of Science and Technology the in Brazil to encourage the supply of Department of Science and Technology domestic inputs and produce, and add Policy Institute of Geosciences of the value to domestic industry,” explains University of Campinas (Unicamp) did Heloisa Menezes, secretary of production a study of how the IT Law affected development, Ministry of Development, IT sector performance between 1998 Industry and Foreign Trade (MDIC). and 2008. Unicamp found that the

April 2012 Ÿ The Brazilian Economy COVER STORY 13

total income of beneficiary companies The Greater Brazil Plan launched nearly quadrupled, productivity grew 42% more than in companies without last August was expanded this incentives, and investment in R & D April with a package of incentives increased 30%. However, this did nothing for Brazil’s for industry to increase national position in the global market. In 2008, content and innovation worth according to the OECD and the United Nations, Brazil ranked 27th among IT about R$60 billion (US$35 billion, exporters—just as it had in 1998. In those 1.5% of GDP). 10 years, the Unicamp study pointed out, while Brazil’s annual exports doubled a requirement of the National Agency from US$1 billion to US$ 2 billion, South of Petroleum, but with only one or two Korea’s shot up from US$34 billion to exceptions, there is no evidence that US$114 billion and China’s from US$$26 domestic suppliers are becoming more billion to US$79 billion. competitive internationally.” Researcher Mauricio Canêdo Pinheiro, Economist José Márcio Camargo, Brazilian Institute of Economics of the Opus Investment Management, cites Getulio Vargas Foundation (IBRE-FGV), another problem: “Petrobras is working believes the IT case proves that policies with a high rate of local content. Since the to encourage local content in Brazilian government is the majority shareholder, industry are inefficient and need to be there is a direct cash transfer from the rethought. In IT, he says, “Brazil has taxpayer to the producers, whether in the not become an international player; it form of tax advantages or of accepting cannot sell its electronics other than in a smaller profit.” Camargo says the the domestic market.” Pinheiro is also domestic content requirement in fact critical of domestic content rules for the assumes that local products are less oil industry: “For years this has been competitive than imported; otherwise, the protection would not be necessary. “This causes two distortions,” he says. “If the domestic product is more expensive but the same quality as the imported one,

Photo: Vladimir Platonow/ABr. it becomes less competitive in terms of price. But if it is more expensive and of substandard quality (which is very likely),

Measures to increase the national value-added are intended to it becomes less competitive promote the defense systems industry, particularly Brazil’s nuclear because of both higher price submarine project.

April 2012 Ÿ The Brazilian Economy 14 COVER STORY

For good or evil, the Rousseff SUNSET PROVISONS The main shortcoming of Brazil’s administration has made protectionist policies is that they have “defense of domestic industry no sunset provisions. Pinheiro explains, “International experience shows that and markets” an explicit goal. industrial policies fully achieve their objectives only if they have a set time and decreased productivity in the limit and benefits decrease over time. industry as a whole.” This is not the case with Brazilian Economist Pedro Cavalcanti, FGV protectionist policies. The way it is done Graduate School of Economics (EPGE), here, the tendency is to create a captive has similar concerns, saying .”Certainly domestic market, with higher prices and industry productivity will be affected—if no prospect of becoming internationally it has not already been, because the competitive.” data show stagnation in recent years. “How many years are necessary … We have adopted almost perpetual to protect certain industries? 20? 30 protection for various sectors of the years? And who pays for the loss of economy without achieving any positive productivity during all this time?” results. An industry that has skilled asks Cavalcanti. Throughout Brazil’s workers and productive capacity would economic history, productivity has not need this kind of advantage.” always grown when domestic markets The circle is vicious: The more were opened up to external competition. protection, the less productive and “In the long run,” Camargo adds, competitive an industry becomes, which “restrictive and protectionist measures in turn calls for more protection. have always taken the Brazilian economy backward.” Pinheiro points out that Brazil’s industrial policies are counter to those that produced the successful indus- trialization of Japan, Taiwan, Singapore, and South Korea, who used every means available to bridge the technolog- ical gap—from shared investments to joint ventures and importa- tion of machinery and

April 2012 Ÿ The Brazilian Economy COVER STORY 15

equipment. He describes how it was done The circle is vicious: The more by South Korea, a leader in shipbuilding: “First, they became competitive by protection, the less productive gaining efficiency in any way possible, and competitive an industry buying ship parts where the price was best. Once they established their reputa- becomes, which in turn calls for tion as a major international player, they more protection. focused on local content just as the other countries did.” Pinheiro thinks the Brazilian Kupfer sees policies promoting local Aeronautics Company (Embraer) is content as indispensable for stimulating a shining example of how well this competitiveness. “There is an ideal vision recipe works. He explains that “Brazil according to which the increase of local has become competitive in the sale of content would be a natural consequence medium-sized aircraft in large measure of industrial development, a kind of because Embraer is free to purchase indicator of the competitiveness of a parts and equipment wherever is most sector,” he says. “The higher domestic advantageous…. The company has a production, the more competitive the local production chain in São José dos industry would be. However, we live in Campos city in São Paulo state, but most a time of major structural change, the of its supplies are imported. If it were result of globalization and fragmentation required to purchase them in Brazil, it of world production, led by countries would probably be off the market in two like China that industrialized late . . . years.” In this context, policies to incentivize domestic content are a decisive factor for ASIAN LEAP reintegrating Brazilian industry into the However, others see differences between global production chain.” Brazil and the Asian tigers. David Glauco Arbix, president, Funding of Kupfer, professor of economics, Federal Studies and Projects Agency (FINEP) of University of Rio de Janeiro (UFRJ) the Ministry of Science and Technology and consultant to the president of and member of the Greater Brazil Plan BNDES, points out that “In Brazil, Executive Committee, agrees with over decades we have built up a very Kupfer: “Because the world economy is complex and diversified industry. We placing severe restrictions on Europe, cannot ignore what already exists … the USA, and Japan, there is a dynamic we need to restructure it and equalize movement of the axes of production in with the international scenario. This which Brazil has to participate, as India is strategically very different from the and China are doing. This is an excellent situation of Asia, where industrialization opportunity for developing countries was incipient.” to restructure for the generation of

April 2012 Ÿ The Brazilian Economy 16 COVER STORY

“International experience shows protected in such a way that knowledge- intensive areas cannot enter. Rather, that industrial policies fully what we are doing is making a great achieve their objectives only if effort to attract the intellectual centers of multinational companies already they have a set time limit and operating here, in order to energize benefits decrease over time. This Brazilian industry.”

is not the case with Brazilian PROTECT TO COMPETE? protectionist policies.” Kupfer thinks the incentives for local content need to be adjusted to the new Mauricio Canêdo Pinheiro national and international realities, but their importance should not be technology. It’s the smarter way to take neglected. He highlights three areas advantage of the crisis.” of action: stimulus to productivity, In Brazil, the issue of local content technology, and innovation in segments, Alimentos: is still associated with protection of such as metal-mechanics, that were once inefficient firms that cannot compete. at the core of industrial expansion but “The problem is that any policy, any have lost competitiveness because of limitation to so-called free market Brazil’s years of disorganization and activities is always subject to that produzir mais low macroeconomic growth; measures criticism that there will be a loss of to support traditional industrial sectors competitiveness,” Arbix says. “However, where production conditions are no sector of the economy is closed or challenged by international competition, such as textiles, clothing, e melhor. footwear, furniture, foods, plastics and metal artifacts,

Photo: Embraer. and simple metallurgy; and support for technologies not Para um futuro sustentável. yet fully developed by Brazilian industry, especially electronics, Semana Mundial da Alimentação 15 a 20 de outubro de 2012 pharmaceuticals, and fine chemicals. Whatever the strategies they argue for, all agree that the best realização way to protect domestic industry from foreign competition is to make it more competitive. The question is how. In specifying Aircraft maker Embraer has become competitive globally without areas of action Kupfer seem to subsidies or protection from foreign competitors. Mais Informações: www.forumagriculturaealimentos.org.br

April 2012 Ÿ The Brazilian Economy

4/4/12 5:24 PM COVER STORY 17

go in two different directions: (1) help Throughout Brazil’s economic the most vulnerable sectors by granting tax advantages or setting prices, without history, productivity has always necessarily requiring major expansion grown when domestic markets of local content or innovation; and (2) invest in new technologies that add value were opened up to external to products and effectively increase competition. Brazil’s ability to compete on equal terms with its main competitors. For most experts, the first group Camargo reinforces the point: “The would be most problematic. Without company that knows it is protected in performance or innovation targets, general does not invest. Look at the protecting sectors just because they automotive industry. Our carmakers face heavy competition or an exchange started up in the 1960s and Korea’s in disadvantage is a stimulus for inefficiency. the 1980s, but we cannot compete with “In the Greater Brazil Plan, the law them. We always seem to be depending giving preference in public purchases on a boost from government.” He benefits mature and traditional sectors in asks, “Suppose some of the shocks to Brazil that must compete with imported industry are structural, and that some goods. In this situation, the policy is sectors have definitely lost the ability clearly a stopgap,” says Pinheiro. to compete, either because of costs or types of product. Will we protect them forever?” Cavalcanti adds, “The candle industry once was very important, but no longer once the light bulb appeared.”

STRUCTURAL CHANGES Mario Bernardini, economist and consultant to the Brazilian Association of Machinery and Equipment (Abimaq), thinks government procurement policy is a valid instrument for protecting and encouraging industry generally, even though it does not directly benefit the capital goods segment: “All developed countries use government power to stimulate and develop production. The United States has done this for decades, though they denounce developing countries that use this policy.”

April 2012 Ÿ The Brazilian Economy

18 COVER STORY

In Brazil, the issue of local associated with local content than on improvements in the business content is still associated with environment, a more efficient national protection of inefficient firms economy, and efforts to train workers. Cavalcanti insists, “We must reduce the that cannot compete. tax burden, invest in infrastructure, reduce bureaucracy, and cut payroll Yet Bernardini also asserts that such taxes. … The aluminum industry has measures will do little to promote even thought of leaving the country, not competitiveness without deep structural because of the exchange rate but because transformations. “We are reaping what of taxes.” we sow by choosing an exchange rate anchor to contain inflation,” he says. TECHNOLOGY FRONTIER Thus, domestic products cost almost While there is some consensus on the double what imported goods cost. “The dangers of indiscriminate protection, Greater Brazil Plan is not an industrial there is also a conviction about the need policy but a set of specific initiatives for actions that promote innovation. that … do not solve the competitiveness Arbix believes that Brazilian companies problem. We need concrete goals to can respond to the challenge, producing accelerate reduction of the Brazil cost.” technological goods of a quality Almost all analysts agree with superior to what is offered overseas. Bernardini. Kupfer thinks the future “Take the case of oil,” he says. “The of industry depends less on advantages frontiers of seismology, advanced physics, new materials, thermodynamics, and nanotechnology are focused on exploration and exploitation of deep sea oil. Is it reasonable that a country like ours, with a high caliber oil company like Petrobras and with significant oil reserves, has no company among the 100 most important in ​​p r o v i d i n g technology to extract oil in deep waters?” Kupfer adds, “Brazil is investing in turbines for

April 2012 Ÿ The Brazilian Economy COVER STORY 19

wind energy production. Much of the “Suppose some of the shocks to value of the project is in the electronic sensor equipment—but we are not doing industry are structural, and that that part. … We should take advantage some sectors have definitely lost of this investment cycle to develop our own technology, which would certainly the ability to compete, either have positive spillover effects on other because of costs or types of supply chains and helping to increase the competitiveness of industry as a whole.” product. Will we protect them But which sectors should be prioritized? forever?” Pinheiro gives priority to biotechnology and genetic research and to building José Márcio Camargo on Brazil’s comparative advantages in areas like agribusiness. Cavalcanti is industry simply disappeared because it “100% in favor of domestic investment was unable to walk on its own without in technology, research, and innovation government protection.” in the areas where we have competitive Local content policies should be tied advantages. This by nature involves risk, to innovation and technology, targeted but that is justified by the possibility of to sectors that have high capacity to high return. This is very different from spread knowledge, and focused on long- subsidizing industries.” term results. “If such policies are applied widely and uncritically, they run the risk TIME TUNNEL of becoming an instrument of short-term Protectionism carries risks. Past protectionism, generating only inefficiency,” protectionist policies generated an says Flávio Castelo Branco, executive extensive comfort zone for Brazilian director of economic policy, National industry. Pinheiro offers an example: “In Confederation of Industry (CNI). the late 1970s and early 1980s, Brazil adopted an aggressive protectionist policy for the shipbuilding sector, financed by the Merchant Marine Photo: Agência Petrobras. Fund. We were second in the world rankings, behind only Japan. But then came the oil shock, the fund ran out of money, and in a few years our shipbuilding The government wants to protect the national suppliers of capital goods for the oil and gas sector from foreign competitors.

April 2012 Ÿ The Brazilian Economy 20 INTERVIEW

The quest for global competitiveness

The Brazilian Economy—Brazil made Photo: Divulgação. it through the international crisis more comfortably than most countries, but last year economic growth was below expectations. What do you think are the prospects for the Brazilian economy? Ozires Silva—I’m not as optimistic as the government. Without a doubt, the GDP of Brazil is lower than the country deserves. … We have the false impres- Ozires Silva sion that the country is going well, but Former Minister of Infrastructure and former president of the numbers show that Brazil’s external Embraer and Petrobras current account has only been balanced

Claudio Accioli, São Paulo by capital inflows, which is problem- atic. . . . Covering the current account Forty years ago Ozires Silva envisioned that Brazil deficit that way generates a liability as would be a major player in international aviation. Twice president of the Brazilian Aeronautics the capital has to be paid back. We must Company (Embraer), the third largest manufacturer have a vision for the future and propose of commercial jets in the world, aeronautical strategies for development. We must give engineer Silva, now dean of Monte Serrat University, priority to education, which is absolutely explains how Brazil can prevail against the tough fundamental for Brazil today. … Brazil competition imposed by emerging Asia, especially cannot reach the necessary revenue China and South Korea. Having served as president of the state oil company, Petrobras, as Minister of potential and profit more because of Infrastructure, and as a reserve officer in the Brazilian constraints than because of lack of incen- Air Force, Silva has a uniquely broad perspective. tives. We cannot do anything without He thinks the main obstacles to Brazil’s competing requiring a government permit, which successfully in world markets are the excessive makes things difficult. The State is in presence of government in Brazilian life and the every corner of Brazilians’ activity . . . education deficit that undermines the quality of our workforce. But he also thinks that with the right I often joke that in Brazil money is not effort such problems can be overcome. at risk. What is at risk are the company,

April 2012 Ÿ The Brazilian Economy INTERVIEW 21

employment, the entrepreneur, and the and what is business; government and product. You must use money not just to business interests are working together generate more money but also to create to create a competitive direction for value. those countries. Brazil would benefit greatly if we could replicate that close Of all the sectors, industry is performing collaboration between the public and worst. Is there a risk of deindustrializa- private sectors. That is all that we need tion? to take action. The competition today is Deindustrialization is already a reality in between countries. This is not company Brazil. Recently Renner, one of the oldest A in Brazil trying to compete with and most traditional textile companies company B in China; it is company A, in Brazil, began to sell Chinese products. alone, having to compete with company What’s worse is that these products are B and its ally, the Chinese government. being paid for mainly by our export of commodities. In that context, what do you think of But more important than making a the Greater Brazil Plan, launched last correct diagnosis of the situation is to year to support domestic industry and know what to do. There are no magical recently expanded? measures, but something undoubtedly The plan itself is comprehensive and well needs to be done about the [appreci- defined, but I think the media have not ated] exchange rate, which has been addressed the issue properly. They have extremely harmful for the country . . . emphasized the amount of tax relief and Brazil’s competitiveness is far below that suggest that the federal government is of our competitors . . . [but] the picture not collecting taxes so it can help entre- can change dramatically if [the exchange preneurs. The correct view would be to rate] is changed. show how much is being invested and There is another aspect that has to what is the expected return, because if be taken into account. I spent much that money comes back, it is not a loss. time as a minister of state and real- What is worrisome is how the measures ized clearly that the government is far will be carried out. We have complex removed from society. As a result the laws to curb corruption, long, full of civil service distrusts the private entre- restrictions, but doing so is related preneur. Meanwhile, if we look at two powerful examples We must have a vision for the future of competing economies today, and propose strategies for development, China and South Korea, we one of which must be to give priority see that it is hard to distin- guish what is the government to education, which is absolutely fundamental for Brazil today.

April 2012 Ÿ The Brazilian Economy 22 INTERVIEW

much more to educa- We must join the On the other hand, tion than to penalties. world community, it’s easy to list the incen- But the laws end up manufacturing and tives that we’re giving not being respected. I for foreign companies fought four years for exporting products to enter Brazil. High the Innovation Law in which we’re taxation, interest rates, and celebrated when competitive and labor and welfare laws, it was approved. The among others, all law is good, really buying when we’re directly subsidize our innovative—but then not. imports. the decree regulating it ruined it, so much so that we see no How do you assess the “Brazil cost”? results. We are lagging behind. There is no use adopting measures just to offset this cost, Are measures to protect Brazilian because they will create problems for us industry and encourage local content in the international market. Reducing regressive? production costs certainly would help. To some extent, imports of foreign Of course there is a problem that must components have helped to improve be faced: the government spends money the production of goods in Brazil. I it does not have, which has increased see nothing wrong with that. We live the tax burden. Infrastructure is some- in a globalized economy, in which old thing that you do not feel, but without concepts such as 100% national goods it you do not move. And Brazil is stuck don’t apply any more. Even products in this regard because the government made in developed countries have a lot has chosen to be. Until the new airport of imported components, systems, and concessions, for a long time there were equipment. The computer is a good no utility concessions granted to the example. Just open one, in any country, private sector, which has resources and and you will find parts from all over appetite to invest. The government lost the world. The outdated idea that all its managerial capacity, and that’s what components of products manufactured motivated me to fight for Embraer to be in Brazil must be essentially national privatized. It was impossible to manage returns us to the policy that prevailed Embraer because the government had from the 1970s into the early 1980s. become a poor shareholder. We must join the world community, The premiums paid for the airport manufacturing and exporting products concessions were very large, much in which we’re competitive and buying higher than expected, which shows the when we’re not. private sector is interested in investing

April 2012 Ÿ The Brazilian Economy INTERVIEW 23

in infrastructure . . . If we hand over that management is perhaps the magic to the private sector everything we can word for the future. That’s what the in terms of infrastructure, Brazil would president asked for from Jorge Gerdau change with extraordinary speed. — a management shock to eliminate the distrust between government bureaucrats You have headed up two major Brazilian and the national productive sector. companies. From the standpoint of management and governance, are we What would be the best strategy for competitive? Brazil to defend against the heavy No. But what the government does is competition from Asia? crucial in determining whether Brazilian Be a better competitor than they are. businesspeople manage efficiently. Much Is that difficult? Extremely. Last year of the efficiency is lost in the govern- Brazil graduated just under 40,000 ment’s huge bureaucracy. Jorge Gerdau engineers. China graduated 630,000. Johannpeter, [president of the Gerdau If we imagine that just 10% of Chinese Group], who is now in the govern- engineers are exceptionally talented, last ment, says that in the United States his year China graduated a larger number company has 3 employees to deal with of talented engineers than Brazil gradu- paying taxes; in Brazil it has 200. ated engineers of all talents. It’s a huge loss of competitiveness, but also a great How do you explain Embraer’s challenge, which can only be overcome success? by education. When I became CEO of Embraer on Several decades ago, General Park January 2, 1970, there was no structure, Chung Hee and Deng Xiaoping launched just one office at the Aerospace Tech- the biggest educational programs their nical Center for company headquarters. countries had seen. The Financial Times From the beginning, I was concerned defined the Korea program as ‘Bigotry for to create a competitive environment in Education’. A month ago, in Detroit, the the company . . . We would not seek cradle of the American auto industry, a subsidies or privileges. Korean car was voted We would win in the If we hand over to Car of the Year. competitive strategy of the private sector Back to the case placing planes in the everything we of Embraer, I am world market. I believe convinced that we are this is the important role can in terms of only able now to sell of a CEO—to change infrastructure, Brazil Brazilian aircraft to attitudes and behav- would change with 90 countries because iors . . . So I would say the company was extraordinary speed.

April 2012 Ÿ The Brazilian Economy 24 INTERVIEW

based on an educa- What the government Sell ​​Brazilian products tional process led does is crucial worldwide as well. That by the Technological in determining is the only way to stop Institute of Aeronau- them. We are a conti- tics (ITA). In Brazil whether Brazilian nental country with t o d a y , h o w e v e r , businesspeople 200 million inhabitants education seems not manage efficiently. and territorial, ethnic, to be a priority . . . and language unity. If We should open the China did it, we can do window of opportunity, correct this it even faster. Simply bring together educational deficiency, and establish a government, the productive sector, and program to beat the Asians. If they sell Brazilian society in the quest for global products worldwide, what can we do? competitiveness.

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Av. Pedroso de Moraes, 1201 São Paulo, SP 05419-001 Tel. (55 11) 3356 1800 Fax (55 11) 3356 1700 www.demarest.com.br 26 Agribusiness Roundtable 44 SEMINÁRIO Agronegócio Rethinking the future of agriculture

Thais Thimoteo, São Paulo

n the last 30 years Brazil 10 years to meet demand, Ihas become, behind only and Brazil will need to the European Union and contribute about two- the United States, the fifths of that. That is why third largest exporter the Brazilian Institute of such agricultural of Economics (IBRE) c o m m o d i t i e s a s and the Agribusiness s o y b e a n s , s u g a r, Center of Getulio orange juice, chicken, Vargas Foundation and beef, producing (GV Agro) presented an agricultural trade the first Roundtable su r p l us o f a b o u t on the Agribusiness US$50 billion in 2010. Scenario, on March 19 That success is due not in São Paulo city. only to abundant natural resources but also to Today internationally recognized Despite its apparent technology centers, with the success Brazilian agriculture Brazilian Agricultural Research must still deal with a variety of Corporation (Embrapa) heading problems, from sanitary issues like the list. Nevertheless, there is global foot and mouth disease (FMD) in cattle concern about possible food shortages, given to structural problems like outdated rural the demand created by 7 billion people today labor legislation, poor access to credit, and and an expected 9 billion by 2050. unresolved environmental issues. According to the Organization for Economic In his keynote address Roberto Rodrigues, Cooperation and Development (OECD), world former Minister of Agriculture and GV food supply will need to increase 20% in Agro coordinator, said, “Globally there is a

Photos: Eduardo Merege.

April 2012 Ÿ The Brazilian Economy Agribusiness 27 Roundtable

need to find a theme that whether the current model will articulate humanity’s “Look at the of agribusiness development demands. I argue that the is too focused on economic theme should be food numbers: planted factors and not enough on and energy security and area in Brazil grew social factors: “This is a model sustainability.” Today, he said, almost 30% in that drives producers out of the world lacks leadership rural areas, that discourages and strategy; because of the last 20 years the younger generations of its agribusiness success, but production rural families from remaining. Brazil is likely to become increased nearly Do we want to continue an important catalyst for with a model focused only pioneering projects: “Look at 180%—six times on global interests? Some the numbers: planted area in as much.” say yes, arguing that as Brazil grew almost 30% in the society modernizes we will Roberto Rodrigues last 20 years but production not need so many people increased nearly 180%—six on farms. But do we want to times as much. In sugar cane be increasingly concentrated farming, we have reduced CO2 emissions to in urban areas?” He added that although 11%—an important contribution to reducing the scenario for Brazilian agribusiness global warming.” seems encouraging, “If you look closely José Carlos Vaz, executive secretary, there are small cracks, uncertainties.” Only Ministry of Agriculture, Livestock and Supply through democratic debate and collective (MAPA), acknowledged that Brazil still faces empowerment, planning and strategy, he problems that ultimately might undermine believes, will Brazil “achieve results that are its privileged position. He also questioned fair, both socially and economically.”

Roberto Rodrigues José Carlos Vaz Luiz Carlos Carvalho

April 2012 Ÿ The Brazilian Economy 28 Agribusiness Roundtable

Luiz Carlos Carvalho, years? … It is not enough to president, Brazilian “One of the sore adopt a law and then push a Agribusiness Association points [in the new button to make it implement (ABAG), said that if Forest Code] is itself. So, we will have to agribusiness is to be more the permanent establish a policy line that productive, “We need to preservation areas certainly will displease both set regulatory frameworks, (APPs)… How will sides.” Luiz Daniel Campos, focusing on sustainability, the government representative, International and encourage investment in remove thousands Finance Corporation (IFC) research. No one is creating of the World Bank, agreed of people who have mechanisms and policies to with Lima about the need do this.” been producing crops for greater legal certainty in the APP regions in the sector. However, he Environmental for years?” said, more relevant than the considerations Rodrigo Lima clash between the farmers Regulation matters. The new and environmentalists about Forest Code “contains flaws the Forest Code is a business that generate legal uncertainties and need concern with sustainability. “If we do not have to be reformed,” said Rodrigo Lima, general a private sector investing prudently, being manager, Institute for International Trade sustainable from a financial standpoint,” Negotiations (ICONE Brazil). “One of the Campos said, “it will not be worth investing sore points is the permanent preservation in environmental issues, because companies areas (APPs)… How will the government will go bankrupt. … Responsible investment remove thousands of people who have will be balanced between economic and been producing crops in the APP regions for environmental objectives.”

Rodrigo Lima Luiz Daniel de Campos Werner Grau Neto

April 2012 Ÿ The Brazilian Economy Agribusiness 29 Roundtable

Lima and Campos agreed will use it to condemn our that much of the problem is “Deforestation agricultural sector, as a way political rather than technical: is a price we as a to pressure us,” Neto said. There need to be policies to society have to help small farmers generate Bottlenecks income or to assist in food decide whether A major deterrent to making distribution.“Today,” Lima or not to pay. agribusiness more productive said, “there are more forests However, the is undoubtedly the lack of than farmlands. Someone sound infrastructure and who does not have enough international logistical efficiency. To Cesar to eat will cut down to plant. community will use Borges, executive director, No one will obey the law. it to condemn Brazilian Association of There should be public Logistics, solutions like policies for Indians, settlers, our agricultural railway privatization are and loggers.” sector, as a way to coming about too slowly. The Werner Grau Neto, pressure us.” reason, he said, is that “The managing partner, Pinheiro ministries and government Werner Grau Neto Neto Advogados law firm, agencies [that deal with thinks that in putting transportation] are in the forest conservation and hands of political parties. agribusiness in opposition to each other, the We are further penalized because the work Forest Code risks undermining agribusiness stops when ministry and agency leadership competitiveness. “Deforestation is a price we changes,” as when the director of the National as a society have to decide whether or not to Department of Transport Infrastructure pay. However, the international community (DNIT) resigned.

César Borges José Torres de Melo Herman Marx

April 2012 Ÿ The Brazilian Economy 30 Agribusiness Roundtable

“This is a sector that production is being halted

contributes 20% of GDP “This is a sector that because it has nowhere to and accounts for 37% of contributes 20% of flow.” jobs. In 2011, it exported GDP and accounts Herman Marx, professor, US$95 billion, 37% of total for 37% of jobs. In School of Advertising and exports. So, it is essential [for Marketing, agreed: “When the government] to invest 2011, it exported you are not investing enough in ways to transport this US$95 billion, 37% of to maintain the existing production,” said José Torres total exports. … At transport network, we can de Melo, vice president, see clearly that Brazilian National Confederation of Brazil’s current low infrastructure is degraded.” Agriculture (CNA). The World level of investment He explained, for instance, Economic Forum ranked in infrastructure, that the problem with Brazil 104th in infrastructure it is impossible to highways is paving, and “Of last year—114th in quality 1,400,000 unpaved roads, of roads, 9th in railroads, maintain the level of 94% belong to municipalities and 130th in ports. “Brazil exports.” that do not have money to invested 1.8% of GDP in build roads. As for waterways, José Torres de Melo transport infrastructure in our cheapest transportation, 1975 and only 0.4% in 2010. we do not use even half of China invested 11% of its GDP on it in 2010, what we could today.” and India 8%. At Brazil’s current low level of investment in infrastructure, it is impossible International trade to maintain the level of exports,” de Melo José Augusto de Castro, vice president, said. “In the North, Northeast and Midwest Association of Foreign Trade of Brazil (AEB),

José ACésarugusto Borges de Castro JoséLeila Tor Harfuchres de Melo MarcoHerman Far Marxani

April 2012 Ÿ The Brazilian Economy Agribusiness 31 Roundtable

pointed out that “There has Technical cooperation been a change for the worse “Think tanks are with other countries to in Brazil’s export composition. urgently needed if promote the development We are concentrating only we are to develop of agribusiness can raise on commodities. … There new paradigms, Brazil global profile, must be a greater effort suggested Marco Farani, to diversify exports.” He one of which is the director general, Brazilian added that Brazil needs to green economy in Cooperation Agency (ABC), take advantage of the huge which growth and Ministry of Foreign Affairs. market that is opening up, “Our job is to send Brazilian because emerging markets sustainability are technicians to improve like China, India, and Russia not antagonistic.” the knowledge of other have no new areas available Silvio Crestana developing countries,” he for planting. “We can said. “While it is an altruistic consolidate our position as activity, non-profit in the the world’s granary,” he said, but he joined short term, it is a way to be recognized the chorus of previous speakers when he and influential. We finance projects and we added, “We have to realize that we need to care for them.” Farani’s agency is currently substantially improve our infrastructure.” cooperating on agribusiness projects Leila Harfuch, ICONE Brazil, pointed in Africa with the Japan International out that since 2000 food prices have been Cooperation Agency (JICA). “The African increasingly volatile because of the imbalance savanna has vegetation similar to the between supply and demand, saying, Brazilian savanna,” Farani explained, “and our “Demand for food is growing at rates higher partnership with Japan provides for transfer than production capacity.” of Embrapa’s knowledge and JICA funding for

Alexandre Mendonça de Barros Edivaldo Del Grande Christian Lohbauer

April 2012 Ÿ The Brazilian Economy 32 Agribusiness Roundtable

infrastructure. We hope to give enough importance to bring Brazilian and Japanese “Although numerous administration . . . This portrait businessmen to see the credit lines are is changing as the second project, to stimulate business available, we risk generation of managers, the opportunities.” sons of the former are more ending the crop year educated. The Program for Risks 2011–12 with the Revitalization of Agricultural The classic idea that small lowest first-time Production Cooperatives farms, even subsistence lending in recent (Recoop) also contributed farms, were intended for to investment in training, the cultivation of different years because of the including training the varieties of food in the infernal bureaucracy managers themselves.” same area is no longer required to obtain Christian Lohbauer, presi- accepted. Now, the trend is dent, National Association of specialization. However, while credit from the Exporters of Citrus (Citrus- that increases productivity, it BNDES and a smaller BR), shared his experience also raises risks, in view of number of private and offered some sugges- possible natural disasters tions: “Since the 1990s na- and lack of credit facilities banks offering credit tional associations have and farm insurance. to farmers.” gained importance because Here, “cooperatives and Ademir Vian out-of-date production struc- associations have a key ture could not cope with the role in the survival of much demand. The entities were dispersed agricultural structure, especially modernized and professionalized in only 15 in the South. They allow for greater resilience years.” But, he explained, with advances also to market volatility while providing the came problems, such as difficulty in adopt- benefits of production scale,” said Alexandre ing a common agenda. “The farmer has a Mendonça de Barros, partner in consultant conflicting relationship with industry repre- MBAgro. However, these groups often need sentatives; and without [transparency] it is better management. “We are very far from difficult to reach a consensus vote on bylaws companies with clear governance, and solid and budgets, because each company has its structure,” Barros said. own,” Lohbauer said. He also noted another In the beginning, Edivaldo Del Grande, problem: “There is a huge gap between what president, Organization of Cooperatives of the the private sector and farmers are willing to State of São Paulo (OCESP), explained, “Old do themselves and the government’s ability managers, often with little knowledge, did not to respond to their demands.”

April 2012 Ÿ The Brazilian Economy Agribusiness 33 Roundtable

How Brazil benefits from technological innovation

When multinationals came into the Brazilian agricultural sector, they brought with them technological innovations to boost productivity. One example is Monsanto, a major U.S. company that applies technology to agribusiness, manufactures herbicides, and produces genetically modified seeds. Intact Pro RR2—soybean seed with high value added now being tested by 500 soybean farmers in Brazil—is the company’s first product released outside the U.S. Currently, the modification process is being approved by major markets Rogério Andrade, Monsanto manager. for Brazilian soybeans. Rogério Andrade, Monsanto manager, says the seed protects the each region. Maize was cultivated between soybean from insect-caused injuries; makes soybean plantings in order to separate the it easier to control weeds (the seeds tolerate new varieties from older ones and observe glyphosate, a strong herbicide); and produces differences in crop yields and other factors higher yields. Andrade says that part of the after harvest. Another breakthrough was US$1.4 billion Monsanto invests annually in the efficient use of the new seeds through technology is spent in Brazil. accountable product management. “What The process by which Monsanto chose remains after planting is entirely recycled,” producers and tested the new type of soybean said Frederico Saraiva, field supervisor of was meticulous. Farmers were selected in the Intact Pro.

Modernization and innovation Lopes, an IBRE specialist in agribusiness, the Technology has driven many of the advances solution is better marketing: “Competition in Brazilian agribusiness in the four decades in the livestock market is largely responsible since Embrapa was established. With the for investments in research today. Large development of new irrigation techniques companies … direct their research according and drought-resistant seeds, in the savanna to market demand, and this is an important grain production, especially of soybeans, has strategy for us.” soared. However, science is still striving to José Carlos de Freitas, director, Chamber cope with such issues as water scarcity, food for Agricultural Machines & Accessories quality, and the implications of biotechnology (Abimaq), raised a concern that the national and bioenergy. For Mauro de Rezende model of agriculture is too costly. He said,

April 2012 Ÿ The Brazilian Economy 34 Agribusiness Roundtable

“Soybeans, for example, are expensive to (Febraban), a “handful of overlapping credit plant due to high prices of pesticides and standards” that do not meet the specific the huge amounts of chemicals used. The needs of agribusiness areas. He said that profit margin is small. You gain only because “Although numerous credit lines are available, of scale. Thus, the number of producers has we risk ending the crop year 2011–12 with been falling since the 1960s.” He pointed out the lowest first-time lending in recent years that “There are 3,000,000 families who do not because of the infernal bureaucracy required have access to agricultural machines because to obtain credit from the BNDES and a smaller there is no way for them to obtain National number of private banks offering credit to Bank for Economic and Social Development farmers. Our challenge is to find sources credit to modernize.” of funding—there is no point in having a Embrapa researcher Silvio Crestana modern machine in the field and no money considered it essential to understand the to buy fuel.” geopolitics of food scarcity in order to use Renato Buranello, managing partner, technology to increase productivity. Here, Demarest & Almeida law firm, pointed out that the Rio +20, United Nations Conference on the lack of interaction between the various Sustainable Development, in Rio de Janeiro possibilities of credit for rural producers. on June 20–22, 2012, could be useful. “Think “We have enough credit instruments for tanks are urgently needed if we are to agribusiness,” he says. “The question is how develop new paradigms, one of which is to put them into practice safely in ways the green economy in which growth and that are economically viable.” José Américo sustainability are not antagonistic,” he de Sá, adviser to the president, National said. “Integrated sustainable expansion in Confederation of Insurance Companies traditional areas—tillage, crop, and livestock (CNSeg), commented specifically on crop integration, for example — could be a way to insurance, saying, “This is not a Brazilian optimize productivity. It is already showing invention. Everywhere else the market has great results.” succeeded this way: The private sector [creates insurance products] and the public Protection and Credit sector takes care of subsidizing insurance The agricultural credit system is, according premiums and ensures solvency for risks to Ademir Vian, deputy director of products caused by nature. This can make insurance and financing, Brazilian Federation of Banks more attractive to farmers.”

April 2012 Ÿ The Brazilian Economy Agribusiness 35 Roundtable

Latin America’s turn?

T h e g l o b a l b o o m i n commodity prices since the 2008 crisis has stimulated Latin America’s agribusiness sector. Imbalance between supply and demand, international economic uncertainties, and China’s food imports have restructured world supply. For Latin America agricultural production prospects in 2011– 2012 thus look promising. A Manuel Otero, IICA representative in Brazil. survey by the Inter-American Institute for Cooperation on Agriculture to expand its planted area (41%), but the (IICA) found that 70% of the representatives IICA thinks it does not invest enough in R & of agribusiness interviewed believe that D, especially compared to the United States performance will be even better this year and Canada, which each invest about 2.5% than in 2010. However, Manuel Otero, IICA of GDP. Otero says that except for Brazil’s representative in Brazil, points out, “Rising Embrapa, “Latin America invests little in food prices can be considered good news R & D. Latin America has no awareness of for exporters in Latin America, but they are how science can contribute to the growth a concern for importing countries, which of agribusiness.” means more than half the countries in Latin Another IICA survey found that producers America.” think that public policy priorities in Latin For Brazil, the scenario can be advantageous America should first ensure the domestic because it reduces competition and helps to market, then stabilize prices and promote consolidate Brazil’s international position in production. Otero concludes that “We should agriculture. “Today it would be inconceivable think less about sectoral policies and more to think of an agricultural summit without about agricultural policies—think about Brazil. … In our continent, Argentina and the responsibility of agriculture for food Brazil have enormous opportunities to production, environment, and reduction of capitalize,” Otero says. poverty in rural areas. Moreover, we must However, to reach a truly positive result, it take a proactive stance and conclude the is essential that investment in research and Doha Round so that we have the same trade development (R & D) rise. Latin America may rules for both agricultural and industrial be the world region that has most potential goods.”

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The persistent apathy of industry

Luiz Guilherme Schymura high, which will lead to more inflows of he manufacturing sector has foreign exchange. The increases in both Tbeen complaining that it is losing commodities exports and inflows of competitiveness. With a fall in industrial foreign capital will continue to stimulate production of 2.1% in January 2012 exchange rate appreciation. Since there compared to December 2011, these is not much that can be done about that complaints have gained strength. The reason for lessened competitiveness, the reasons cited for the loss in competitiveness focus of the analysis should be on the are appreciation of the Brazilian real, and high “Brazil cost” and ways to reduce the high “Brazil cost.” it. Is this indeed a reason for tangible With regard to the exchange rate, the concern about our manufactures? prospects are not favourable. As China The share of the manufacturing continues to grow at about 8% per year, industry in GDP fell from 15.3% exports of Brazilian commodities are in 1996 to 14.0% in 2007 and then bound to rise. Meanwhile, the economic problems of Europe and America are Director, Brazilian Institute of Economics of the Getulio likely to keep international liquidity Vargas Foundation.

April 2012 Ÿ The Brazilian Economy 38 VIEWPOINT

Measures are needed to When the economic situation is facilitate operation of the satisfactory but industry is not going so well, what should we do? domestic industry, but they When we take into account the tremendous efforts Brazil had to should not hinder foreign make to industrialize, fears of rapid deindustrialization are understandable. competition. For decades, governments of different political and ideological persuasions have accelerated in the last four years, taken action to encourage and promote dropping to just 12.4% of GDP in domestic industry. Although the ways in 2011. However, while the drop in the which industrialization was conducted participation of manufactures in the might be criticized, undeniably Brazil’s domestic economy cannot be disputed, manufacturers have been efficient and international experience shows that competitive in many areas. Our exports as a country develops, manufacturing have become more diversified, so the inevitably gives way to services. country is less vulnerable to variation in What is striking in the case of Brazilian the price of any single product. Growth manufacturing is the persistent apathy in productivity was higher over time in that is reflected in the numbers. Industrial manufacturing than in other sectors of production in January 2012 was roughly the economy, and it has generated jobs the same as it was in December 2007. for a skilled workforce. The country is growing, in other words, Since industry is apathetic, the world but manufacturing is not. economy is uncertain and bringing The leading indicators related to the about devaluation is difficult, we should Brazilian macroeconomy show no cause therefore move to address the “Brazil for major concern: average annual GDP cost.” Measures are needed to facilitate growth is less vigorous than would be operation of domestic industry, but they preferred—hardly more than 4%—but should not hinder foreign competition. far from bleak. The trade balance has We must give priority to policies that shown surpluses, and current account reduce the production costs of Brazilian deficits are not high enough to be firms, as has been done with payroll worrisome. Domestic interest rates, tax relief for specific industries. Policies although high, are declining. Despite the that raise barriers to entry for foreign size of the government, it has been able competitors are not recommended to maintain primary fiscal surpluses. because they promote inefficiency, Inflation, though above target, is still which is then covered up by abusive within the comfort zone. pricing.

April 2012 Ÿ The Brazilian Economy IBRE Economic Outlook 39 The Brazilian economy is recovering, but more slowly than expected. Low inflation, high unemployment and income growth are promoting recovery, but lack of dynamism in industry and an expected slowing down of purchases of durable goods will act as a brake.

razil’s economy has been recovering, thanks IBRE Economic Activity Indicator, March 2010-March 2012 Bto retail, the construction industry, and (Percent change over the previous quarter and 12-month moving average over the previous 12 months, seasonally adjusted) financial services, which have been benefiting from credit expansion. On the upside, low inflation in March brought 12-month inflation down to 5.24%. Unprecedentedly low unemployment and steady growth in incomes have boosted sales. The public budget posted very positive results in the first quarter and recent strength in revenues suggests that the primary budget surplus target for 2012 seems feasible. So far, Brazil’s external accounts have not been much affected by slow growth in the U.S. and financial turmoil in Europe. Although growth in exports slowed, the trade balance in the first quarter was positive. Sources: IBGE, and IBRE staff estimates. Moreover, prices of major export commodities increased more than in the same quarter last year. For the remainder of the year Brazil’s Summing up, recovery in the second half is external outlook is moderately optimistic, and expected to be larger because manufacturing capital inflows should easily finance the current is anticipated to expand faster — there is account deficit. (subdued) optimism about industrial activity On the downside, the weak recovery of based on the renewed government activism industrial activity in February and the results of represented by the industrial policy measures an industry survey in March confirmed a lack announced recently. of dynamism in manufacturing. Moreover, a This optimism contrasts with concerns that slowing of purchases and rising defaults raise the current benign outlook for inflation will doubts that credit expansion will continue at the reverse itself later in the year under pressure current pace. Finally, household consumption— from increases in incomes and the minimum which has been an important factor supporting wage and their effects on demand for services, domestic demand—should cool because which is already overheated; this would force household debt is increasing and a durable- the central bank to raise interest rates, which goods buying cycle is ending. would in turn curb economic recovery.

Short-term indicators Industry’s production and confidence index, March 2010-March 2012 The recovery progresses, but slowly. The (% change quarter-on-quarter) quarterly moving average of the IBRE Economic Activity Indicator, which anticipates GDP, reached 0.7% in February, and GDP is estimated to have increased by 0.6% in the first quarter. The IBRE industrial survey projects a modest recovery. But the indicator of planned production is virtually stagnant, despite a slight improvement in the Industry Confidence Index. Industry is estimated to have grown just 0.8% in March compared to 1.3% in February. Sources: IBGE, and IBRE industry surveys.

April 2012 Ÿ The Brazilian Economy