Letter IEDI n. 929–Brazilian industry and its dependence on imported inputs
The Brazilian industry has faced a situation of very low competitiveness for some decades, whose causes, although well known, have proven difficult to solve. The more we postpone the solutions, the greater the country's industrial losses and, as a consequence, the larger the obstacles to development and sustained economic growth. This Letter —elaborated from a study by Paulo Morceiro (USP) for the IEDI— deals with the penetration of imported inputs in industrial production chains.
As the IEDI document "Industry and Brazil of the Future" (in Portuguese) pointed out, our competitiveness problems are of the most varied nature, including systemic cost factors such as: levels of interest rates detached from international reality, scarce sources of long-term financing, a complex and costly tax system, an insufficient and deficient infrastructure, and modest productivity gains resulting from the country's low investment environment. All this together with long episodes of exchange rate overvaluation.
The consequences are the most adverse. The share of manufacturing has declined in the productive structure since the 1980s, reaching a trough of 11.3% of GDP in 2018. Worse, the losses were more serious in the branches of higher technological intensity (Letter IEDI n. 920). In the world trade in industrial goods, our already marginal presence shrank further from 0.8% of total manufacturing exports in 2006 to 0.6% in 2017 (Letter IEDI n. 892).
But it was not only the external competitiveness of the Brazilian industry that was harmed. In our own domestic market, national production was squeezed by imports. This is what the trade balance of Brazilian manufacturing suggests, as it went from a surplus of US$ 31.4 billion in 2005 to a deficit of US$ 63.6 billion in 2014 and which could have been even worse were it not for the magnitude of the 2015/2016 economic crisis that reduced the country's import momentum.
Morceiro’s study, prepared for the IEDI, shows another deleterious consequence of this loss of competitiveness: the collapse of the industrial system resulting from the greater penetration of imported inputs and components without increases in production as counterparts. Data from the IBGE Annual Industrial Survey were used to analyze this topic during the country's GDP growth phase (from 2003/2004 to 2013/2014) and in 2016, the last year of the recent crisis.
The issue is of the utmost importance because the advance of imported inputs in production chains, while contributing to increased productivity and competitiveness of the economy, may also have a negative effect on domestic suppliers, reduce intersectoral linkages and limit technological development, which, increasingly, is carried out by the foreign suppliers of the main components. In addition, by reducing industrial transformation, it increases the assembly stages with the use of low-skilled labor and low wages, thus causing lower value added generation.
The main results of the study are presented below.
Brazilian manufacturing showed a significant increase in the import coefficient of tradable inputs and components (ICTIC) in the growth phase of the 2000s. From 2003/2004 to 2013/2014, the ICTIC of the manufacturing industry increased from 16.5% to 24.4%.
The main source of this rise was the category of high and medium-high technology intensity goods, whose ICTIC registered a much higher increase than the average of manufacturing as a whole: from 26.3% to 38.7%.
In the recent economic crisis, however, due to the pro cyclical nature of our imports, the manufacturing ICTIC declined, but only moderately to 22.3%. However, the penetration of imported inputs in high and medium-high technology branches advanced even more, reaching 41.4%.
This performance of the most technology-intensive industry stems from the fact that Brazil does not produce several key technological components, which makes imports of these inputs rigid. In addition, due to the severity of the crisis, it is likely that industrial plants producing technology intermediaries, which had already been suffering from the appreciated exchange rate and "Brazil Cost" in the previous phase of expansion, did not resist and had to interrupt their operations.
Thus, if the degree of production densification of the Brazilian industry remains relatively high, this is due to the branches of lower technological intensity, whose weight in our productive structure is significant. In other words, competitiveness in the low- and medium-low technology sectors that are intensive in agricultural, mineral and energy inputs prevents an even greater deterioration of the ICTIC indicator in Brazil.
It is mainly for this reason that the country's industrial density is higher than the average of the fifteen countries with the largest industrial parks in the world. We stand in front of countries like China and Russia, but also of the United States and Japan. In high and medium-high technology, however, the penetration of imported inputs is greater than in these countries, as well as in South Korea, India and the international average.
Taking into account 258 industrial classes, Morceiro's unpublished study shows that more than half of the industrial classes of high and medium-high technological intensity have a moderate-to-high import content of intermediate inputs. The cases of greater thinning of the industrial fabric were in sectors such as: electronics, computer and optical products; other transport equipment; chemistry and pharmaceuticals. An expressive part of these sectors resembles a maquiladora.
This happens in the high technology industry because, in the last decades, Brazil lost price competitiveness due to long periods of exchange rate appreciation, "Brazil Cost" and increased competitiveness of foreign competitors. Certainly, the loss of technological competitiveness also helps explain the performance of activities whose import content is higher.
In addition, the country also did not have a vigorous policy of productive transformation focused on innovation and exports, neither in the period of industrialization nor more recently, unlike the advanced countries and emerging economies such as South Korea and China.
Thus, whenever the technological frontier expands, as is happening again with the emergence of Industry 4.0, Brazilian imports increase to meet the new demand of companies and consumers for advanced intermediate inputs and new products.
As a result, the outlook for the future is not the best. The country urgently needs a modern industrial policy so as not to lose once more the windows of opportunity that open at the beginning of a new industrial revolution and not be permanently left behind in the race for development.