Industry in São Paulo fell almost 20% in the last 10 years reflecting Brazil’s deindustrialization

By Luisa Purchio

Data from the Monthly Industrial Research, conducted by the Brazilian Institute of Geography and Statistics (IBGE), show that in the last ten years, until February 2023, the industry in the state of São Paulo shrank 19%, above the national number, of 14.6%.

São Paulo is the fourth state with the largest deindustrialization in the period, after Espírito Santo, which dropped 35%; Bahia, 30.3%; and Ceará, 23.9%.

“São Paulo is the main engine of Brazilian industry and accounts for about one-third of all national production.”

“Therefore, deindustrialization in the state ends up being a snapshot of what happens in the country as a whole,” says Igor Rocha, chief economist of the Federation of Industries of the State of São Paulo (Fiesp).

Brazil has been deindustrializing since the 1980s, which is highly damaging to the national economy.

After all, the sector generates many jobs along the production chain, and the commercialized items have higher added value, being its development fundamental for a country to transition to a rich country.

In Brazil, however, several factors have caused the country to suffer from what Rocha calls “early deindustrialization,” i.e., the industry’s participation in the economy decreases before it reaches a greater degree of maturity.

“It is very difficult for a country to become rich if it suffers this process of early deindustrialization because another process occurs, which is the middle-income trap; it gets locked into that.”

“This is a bit of what is happening with the Brazilian economy,” he says.

Gazeta do Povo heard specialists point out six causes for deindustrialization:

• Tax complexity
• Government incentives
• Investment in infrastructure
• Low quality of labor and professional training
• Investment in research and innovation and partnerships with universities
• The attraction of investments and high interest rates

1. TAX COMPLEXITY

Specialists pointed out that tax complexity is one of the main factors holding back the development of the industry.

In this sense, expectations about tax reform are high, mainly because of the debureaucratization it should bring.

“When we talk about deindustrialization, a good part is related to components outside the factories and the difficulty of operating in the country.”

“The most obvious of these is the tax system’s bias.”

“The reform will be fundamental to generate an exogenous shock in the economy’s productivity and reduce the anti-industry bias of our tax collection system.”

“This, today, is a necessary condition”, says Claudio Roberto Frischtak, president of InterB and former economist for industry and energy at the World Bank.

2. GOVERNMENT INCENTIVES

For Paulo Roberto Feldmann, consultant and professor of Economics at USP, the Brazilian government needs an industrial policy that defines the country’s priority sectors and will receive government incentives, as occurs in the United States and Europe.

“We haven’t had an industrial policy since the military government because, after that, it was believed that the market solves everything, but it solved in favor of foreign companies and destroyed the national ones,” he says.

“We are the country with the greatest exposure to solar energy in the world, but we don’t manufacture the most important equipment, the solar collector.”

“There was never a plan by the government to stimulate national manufacturing,” he adds.

3. INVESTMENT IN INFRASTRUCTURE

Another point for the development of the industry is the investment in infrastructure, such as transportation, electricity, and basic sanitation.

The transportation area, for example, is fundamental to facilitate logistics for raw materials and components that São Paulo companies must purchase in other states and to ship items they produce.

“One of the most serious issues in the industry is transportation; Brazil has no railroad transportation.”

“You can even say that São Paulo does, but the other states don’t.”

“We are very dependent on trucks, and no country in the world is still like this, not even Argentina. We use it because we don’t have railroads,” says Feldmann.

“Another point is the inferior quality of electrical energy.”

“In the state of São Paulo, which is above the Brazilian average, the number of hours per year that companies are without power varies from 15 to 16, while in Japan, this rate is one minute,” he adds.

4. LOW QUALITY OF LABOR AND PROFESSIONAL TRAINING

A key issue for industry and business environment productivity is the educational training of the professionals these companies will absorb.

Unfortunately, Brazil leaves much to be desired due to low-quality training, especially in public schools.

In 2019, in the state of São Paulo, for example, which has rates above the national average, 43.4% of students completed high school with adequate Portuguese language learning and only 11.7% in Mathematics.

5. INVESTMENT IN RESEARCH AND INNOVATION AND PARTNERSHIPS WITH UNIVERSITIES

A fundamental factor for industry development is investment in research and innovation, which is still incipient in the country.

A report published last year by the Ministry of Science, Technology, and Innovation (MCTI) pointed out that Brazil invested approximately R$89.5 billion in science and technology, corresponding to 1.21% of GDP.

For example, Germany and the United States invested over 3% of GDP.

The partnerships of companies with universities, the cradle of scientific research, are also hindered.

“São Paulo has the best universities in the country, but at USP, for example, it is forbidden to have agreements with companies.”

“Generally, the rectory doesn’t approve because the company wants to disclose that it supports or finances research, but it can’t be published in the press. No company will want to do that without publicity”, says Feldmann.

6. ATTRACTING INVESTMENTS AND HIGH INTEREST RATES

The high interest rates in the country, although necessary to control inflation, also harm the business environment.

Investors prefer investing their resources in Tesouro Direto or CDI, for example, without taking risks, instead of investing in companies and betting on higher returns.

“The manufacturing industry is very sensitive to interest rates.”

“It does not have subsidized credit like letters of credit, CRIs, CRAs, or incentivized debentures.”

“When a very strong monetary tightening occurs, and Brazil is leading the world, the industry suffers more because it has no tool to mitigate this monetary tightening”, says Igor Rocha from Fiesp.

DEINDUSTRIALIZATION AND SERVICES IN THE STATE OF SÃO PAULO

For Claudio Roberto Frischtak, president of InterB, despite the difficulties faced by the São Paulo and Brazilian industry and its contraction, there is a parallel growth movement in the services area.

“São Paulo is gaining density in the advanced services sector, and part of this transformation process causes loss of industrial density.”

“There is a diversity of services that sometimes confuse, for example, software production. A large part of what startups do is service, even though some produce goods,” he says.

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