Letter IEDI n. 866—Brazil's recent experience with local content policies
This Letter IEDI is a continuation of a series of fifteen studies on various topics —infrastructure, investment financing, innovation, changes in industrial structure, productivity and productive development policies, among others— that have supported the elaboration of the IEDI industrial strategy, to be announced shortly. Some of these works are already available: Letters IEDI n. 855, Jun 26, 2018; n. 856, of Jun 28, 2018; n. 857, Jun 29, 2018; n. 858, Jul 2, 2018; n. 859, Jul 3, 2018; n. 860, Jul 5, 2018, n. 862, Jul 10, 2018, n. 863, Jul 12, 2018 and n. 864, Jul 13, 2018.
This edition is based on the study coordinated by João Furtado, economist and professor at Poli/USP, which is available on the IEDI website (in Portuguese). It summarizes the analysis of the recent Brazilian experience with local content policies, whose results still require systematic and in-depth evaluations. Evidence has been gathered to help advance a balanced analysis of these policies for the following sectors: automobiles, oil, IT, equipment to produce wind power and pharmaceuticals.
In the past, local content policies were one of the central pillars of development policies in most countries, and they are still widely used today. In the United States, for example, the most explicitly focused instrument to support local production is the Buy American Act which, since 1933, mandates purchases from local manufacturers by federal, state and municipal investment projects.
Brazil has practiced protectionist policies and local content policies for a long time, with results that continue to be debated. While, on the one hand, there is the recognition that Brazilian industrialization and development owes much to the policies that promoted them, on the other hand there have been criticisms that blame such initiatives for many of our ills, including industrial backwardness and the competitive shortcomings of our productive system.
Although the debate is still alive, according to João Furtado and his coauthors it is undeniable that the policies of import substitution and local content were important foundations of the constitution of an industrial Brazilian economy that had high dynamism and density until at least the 1980s. By this time, the convergence of a new technological and industrial revolution, on the one hand, and the effects of an external crisis, on the other, contributed to a prolonged paralysis in the progress of our industrial system.
Among the recent actions, the authors evaluate that there are cases where signs of failure of local content policies seem more numerous, such as the Information Technology Law and Inovar Auto. There are others whose assessment is very difficult due to the profound changes in the market environment in which they operated, like the policies for the oil and gas sector. In the pharmaceutical sector there are positive results, with the development of synthetic and biological drugs, and the apparent technological learning, although their speed has not ensured the desired benefits yet. In the case of wind energy, the signs of success are clearer, with the internalization of technological activities that were previously non-existent, with greater complexity, and the gradual incorporation of new components and production processes.
Thus, it seems inappropriate to reject any and all local content policy design, as many have done in Brazil, even though it is true that some of our recent experiences have not had the desired results, either due to deficiencies in their conception or due to implementation errors and deviations. More robust evaluations of all these experiences are still needed, especially because there are cases of relative success that are not recognized in the current debate, such as wind power generation.
For local content policies to produce results more quickly and effectively as possible, avoiding fierce opposition and irreparable abandonment, as has been seen, the authors of the study have some recommendations and point out restrictions that the design of local content policies should respect:
- If the distance that separates the local industrial base from the international reference horizon is very large, prudence recommends that local content policy is not instituted before a preparatory phase that will gather the elements necessary to fill the identified gap.
- If the change in the technological frontier is too rapid, perhaps the most appropriate recommendation is to avoid investing in local content beyond pilots or well-defined segments.
- Policies that impose temporary costs on consumers may be more feasible than those that impose costs on the industrial system, avoiding a cascading subtraction of competitiveness on successive segments.
- Adoption of the principle of being extreme selective about local content policies, accompanied by the provision of sufficient support to reach results that ensure international competitiveness.
Finally, it is worth emphasizing the principle that guides all proposals for industrial policy made by the IEDI, namely, the establishment of deadlines for policies, periodic assessment of results and constant design improvement.