Letter IEDI n. 1096—Industry: a lever of growth
In Brazil, the importance that the industry plays in economic growth has been ignored in recent years. We go against the rest of the world, which, for almost a decade, has been intensifying the adoption of policies aimed at consolidating or reinvigorating the dynamism of industrial activities.
It is worth remembering the extensive survey carried out by UNCTAD in 2018, which identified no less than 114 industrial strategies adopted since 2000 in 101 economies that, together, represented around 90% of global GDP. Of these, 74% were adopted after 2013. More recently, the Biden Plan in the US, China's 14th Five-Year Plan and the European Union Recovery Plan are examples of this process.
The IEDI has long been warning of the profound negative effects of the industry's shrinkage as a share of our production structure. This results from the absence of a well-defined and forceful strategy to break the current situation and revive the industry, strengthening the Brazilian economy. The industry has this power due to characteristics that, although not exclusive to it, are not seen as widely and intensively in other economic activities.
Some evidence illustrates this point. The industry, although currently representing around 10% of the national GDP, is responsible for 67% of private spending on R&D, accounts for more than 50% of the country's exports, establishes employment relationships that are mostly formal and pays wages above the national average.
These contributions to the economy could be much greater and the country could be more innovative and enjoy higher productivity and economic growth if its industry were not penalized by the very inadequate policies in place for a long time.
For example, distortions in the tax system are among the most prominent causes, as they generate a tax burden of 45% on the sector's value added, leading the industry to account for 26% of total tax collection. These levels are much higher than those of other sectors of the economy and far beyond the current expression of industrial GDP in Brazilian GDP, which, as we have already observed, is close to 10%.
Today's Letter IEDI, based on a study by economist Thiago Moreira, professor at Ibmec/RJ and consultant at the IEDI, digs deeper on an issue of fundamental importance for the post-pandemic recovery that lies ahead with the advance of vaccination: the significant capacity that industrial activity has to leverage the expansion of the economy as a whole, far beyond other economic sectors. In other words, the industry potentially remains as the main engine of GDP growth.
This capacity is what economists call the “multiplier effect,” a quantification of the power that a given sector has, when producing goods and/or services, to induce the growth of other productive sectors, through its input demand.
Thus, as or more important than its share of GDP, the relevance of a sector for economic growth depends on its multiplier effects. Not every activity with a high share of GDP is capable of boosting and leading economic growth trajectories.
From this perspective, the industry figures are very illustrative. The author estimates that, in 2019 and 2020, the multiplier of Brazilian manufacturing was 2.14, which means that each R$ 1 produced induced an increase of R$ 2.14 in total economic output. It is the only sector with a multiplier above two.
Other industrial segments, following the National Accounts perspective, are also among the largest multipliers: 1.85 for the extractive industry and 1.87 for construction and the electricity, gas and water industries in the year of 2020.
In most of these industrial sectors, there has been an increase in the multiplier in the last five years, according to the study's data. In the case of the extractive sector, the rise was of +0.12, in construction +0.07 and in manufacturing +0.03, mainly due to changes in relative prices.
As for the other sectors, services, whose share in Brazil's GDP reaches 63%, have a much lower capacity to boost the economy than manufacturing. In this case, an increase of R$1 in production leads to a rise of R$1.46 in the general level of economic activity, according to an estimate for 2020.
The services multiplier is the smallest among the large sectors of the economy and would be even lower if it were not for transport services (1.85) and retail trade (1.56). However, transport and retail activities, as the study points out, do not occur autonomously, being linked to some traded and/or transported good arising from national industrial or agricultural production or from imports.
Therefore, transport and retail services tend to leverage the dynamic effects of the industry and agriculture more than to boost growth themselves. Furthermore, it is important to emphasize that the main vector of stimulus comes from the industry, since the sale of agricultural goods is responsible for generating only 8.6% of the production value of retail and 20% of the value of transport activities.
As for agriculture, whose growth was a positive highlight in Q1'21, its effect as a driver of production for the rest of the economy is also lower, being well below that of manufacturing. Its multiplier was calculated by Moreira at 1.67 in 2020, lower than in 2015, due to the advance of imported inputs.
In other words, agriculture has a more limited capacity to radiate growth. This helps to explain, for example, why in 2017 its GDP expanded no less than +14.2%, according to the IBGE, while Brazil's total GDP grew only +1.3%, or why the +5.2% increase in Q1'21 did not produce a total GDP growth greater than 1%.
These data suggest that an avenue to be taken by Brazil to grow more and generate more jobs is through the industry's reinvigoration. For this, we will have to adopt a modern industrial development strategy, similar to what world powers such as the US, Europe and China are doing. The price of giving up our industrial skills tends to be high.
The loss of competitiveness of the national industrial production, due to the various dimensions of the so-called "Custo Brasil" (Brazil Cost), has compromised the sector's densification and favored the growing penetration of imported inputs—as shown in Letter IEDI n. 929—without counterparts in the expansion of our manufacturing exports, making the sector's multiplier smaller than it could have been.
The US manufacturing industry, whose composition is more homogeneous and dense than ours, has a multiplier of 2.35 vis-à-vis 2.14 in Brazil. Higher multiplier effects are associated with a more robust presence of sectors producing intermediate goods, which are capable of amplifying the positive impacts on output arising from a period of income and aggregate demand expansion.