Brazil’s Industry Sees Modest Gains but Falls Far Short of Recovery

(Analysis) After a decline in 2023, Brazil’s manufacturing industry slightly improved in early 2024. By mid-year, industrial production had risen by 2.6%, according to the Brazilian Institute of Geography and Statistics (IBGE).

Despite this growth, the sector still lags 14.3% below its peak in May 2011. From the 1970s and 1980s, the industry’s contribution to Brazil’s GDP has significantly decreased.

The manufacturing trade balance has also suffered, recording a deficit every year since 2008. The first half of this year marked the worst performance since 2014, with a deficit reaching $33.3 billion.

Experts widely acknowledge the phenomenon of “premature deindustrialization” in Brazil. In general, as countries evolve from low to middle income, their industrial sectors expand.

However, as they advance to high income, the focus shifts towards service sectors driven by higher consumer spending and advanced industrial demands.

This transition, although typical, has occurred too early in Brazil due to globalization and manufacturing shifts to lower-cost Asian countries.

Several domestic factors exacerbate Brazil’s industrial challenges. These include high inflation and interest rates, an unfavorable exchange rate that hinders exports, and government fiscal imbalances.

Additionally, political instability, legal uncertainties, inadequate infrastructure, a complex tax system, poor educational standards, and high energy costs also contribute to the challenges.

Reassessing Brazil’s Industrial Strategy

Eduardo Eugenio Gouvêa Vieira, president of Firjan, stresses the importance of resolving these foundational issues to support any industrial policy or protective measures.

Rafael Cagnin, chief economist at the Institute for Industrial Development Studies (Iedi), highlights that many structural problems worsened during the economic crises starting in the 1980s.

Simultaneously, global economic changes and the rise of Asian economies in global production chains surpassed Brazil’s outdated industrial strategies, which had been effective since the mid-20th century under the import substitution model.

The diminishing competitiveness of Brazilian manufactured goods is evident in the trade balance, consistently negative since 2008.

A study by economists Edmar Bacha, Victor Terziani, Claudio Considera, and Eduardo Guimarães links this to excessive import tariffs from past industrial policies.

These tariffs reduced the incentive for domestic industries to invest in technology and productivity. Cagnin argues that merely increasing competition for Brazilian industry without a sustainable, long-term development strategy will not suffice.

However, significant global shifts, such as geopolitical tensions and the need to combat climate change, offer new opportunities.

Rafael Lucchesi, a director at the National Confederation of Industry (CNI) and the Social Service for Industry (Sesi), advocates for Brazil to capitalize on sectors like biofuels, which could integrate with the automotive industry.

He also points to electricity-intensive industries that pursue renewable sources, such as steel, cement, and petrochemicals. This evolving scenario underscores the need for Brazil to reconsider its industrial policies.

By focusing on sectors where it has competitive advantages and embracing new technological advances, Brazil can redefine its economic path in the face of global changes.