Letter IEDI n. 934–The industry's relevance for growth
Given the strong presence of economies of scale, investments in innovation and interaction with other economic sector, the manufacturing industry tends to lead the increase in average productivity rates and sustain economic growth. In Brazil, this is no different.
However, Brazilian manufacturing was the sector that lost the most share in our GDP in the last decades, as shown in previous IEDI studies, such as Letter n. 920. In the recent period, this trend deepened with the crisis that hit the sector in the 2014-2016 triennium, making it contract from 15.4% of total value added in 2000 to 11.9% in 2018.
According to a study by Paulo Morceiro (discussed in Letter IEDI no. 929), this process was accompanied by the collapse of many productive chains, that is, by the strong penetration of imported inputs, without our manufactures having a greater presence in world trade. In other words, due to the competitiveness problems that the Brazilian industry faces, the larger import penetration reflects less a stronger integration in global value chains and, more likely, cases of displacement of national production by foreign products, with no benefits for exports, contrary to the experience of the most successful emerging countries.
In spite of all this, today's Letter IEDI shows that manufacturing has preserved its potential role as a machine for economic growth in Brazil, even in one of the worst moments of its history. The study was based on the Input–Output Matrix, whose latest update by the IBGE brought information up to the year 2015.
Two aspects are behind this role. The first one is that the performance (positive or negative) of the manufacturing industry has a great feedback ability, with the evolution of any given segment of the sector affecting others, which then affect the former and so on. This stems from the fact that 60% of its consumption of intermediate inputs (2015 data) consists of goods produced by the manufacturing industry itself.
The second aspect is that manufacturing has great capacity to influence other sectors through the use of the goods and services they produce as industrial inputs. In 2015, for example, 11.6% of the inputs consumed by Brazilian manufacturing came from agriculture, which represented 53.4% of the latter's total output.
In the case of the extractive activities, their products weighed only 8% in the intermediate consumption of manufacturing, but this represented no less than 68% of the total produced by the sector in 2015. It is worth mentioning that these values were higher in the past and fell because Brazil neglected to add value to these primary products —agricultural or mineral— through industrial transformation.
A more precise evaluation of the mobilizing capacity of manufacturing in the productive structure, that is, in relation to all economic activities, can be obtained by the direct technical coefficients of the Input–Output Matrix, which allow comparing the relative importance of different sectors by their impact as demanders of others' output (backward linkages).
In this case, the IEDI study concludes manufacturing has the strongest links as buyer of intermediate goods. Its technical coefficient is the largest in the matrix, with a value of 0.61. The second activity in importance in 2015 was electricity and gas, water, sewage and waste management, but with a coefficient 17% lower (0.506) than the manufacturing industry's.
Another form of assessment is through the so-called Leontief Matrix, which presents the direct and indirect relationships between economic activities. In this case, the coefficients aggregate all the effects that a change in a given activity's demand has on others.
From this perspective, it is again verified that manufacturing has the highest coefficient (2.15), which is true for all the years analyzed by the study. Electricity and gas, water, sewage and waste management were, once again, in second place in 2015 (1.95).
Given these results, there is no doubt that the most strategic sector to boost the growth of the economy as a whole is the manufacturing industry. In other words, when manufacturing grows, the chances of GDP taking off are high. Without industrial growth, it is more difficult to boost domestic production. It is also worth noting the increasingly important role of the infrastructure —represented by activities like electricity and gas, water, sewage and waste management— in stimulating the Brazilian economy.
Thus, the evidence found by the IEDI study helps to understand the reason for the severity of the crisis that the Brazilian economy lived in 2015-2016, since the industry faced the largest and most lasting losses. It is worth remembering that the sector was already suffering in 2014.
The evidence also helps to understand the fragility of the recovery phase that began in 2017. Due to the long-standing competitiveness difficulties and the harshness of the recent crisis for the sector, Brazilian manufacturing, while remaining the main growth driver, has seen a partial deterioration of its capacity to play such role.
This is what the decline of the industrial coefficients in the 10 years between 2005 and 2015 shows. In the case of the direct coefficient —which measures the impact of manufacturing as a source of demand for inputs from other sectors— the drop was -0.8%. In the case of the coefficient that measures the total effects, that is, both direct and indirect, the decline was -3%.
As only data up to 2015 are available for the Input–Output Matrix —whose elaboration by the IBGE is highly complex— we present only a partial analysis of the behavior of the impact coefficients of Brazilian manufacturing, but it already indicates the negative structural consequences of the sector's 2014-2016 crisis.