?The success of the import substitution strategy and its pain. Originally, the Brazilian economy was deeply depended on primary commodities exports which had followed the industrial structure in the colonial era, until hitting the crisis of sluggish exports due to the Great Depression in 1930. E. g. in 1920s, coffee accounted for 70% of exports, 10% of the GDP. As post-WW? , in 1950s, defeated countries or developing countries who did not have social capital fundamentals and infrastructures took a policy of protectionist for the purpose of enhancement of domestic industries, modernization.
Similarly, for the purpose of their economic growth and “Industrialization”, Brazil also took the import substitution strategy. In the post-war world situation at the time, It can be said that this is a natural choice. It was the very essential matter for Brazil to establish a modernized and industrialized state in the next generation to move away from predicament where Brazil had stood. It was really important to do as well as to give additional values to many types of goods in the primary industry. Since Brazil’s social capital accumulation was so vulnerable at that time, it was indispensable to utilize FDI.
So they sought to attract foreign capitals to invest more by applying a variety of incentives. As a result, the FDI increased in 1950s. In order to ensure the import substitution strategy, Brazil took a series of measures such as tariff, non-tariff barriers, exchange controls, import licensing system, credit control through the BNDE, various incentives. Particularly important one was the “Plano de Metas” in 1956, to create a state-owned enterprise policy applied for the key industries in order to try to make them strong and sound.
While it was set to a high level, such as 250 percent tariff rate to foreign products, it was given exclusive authority to the state-owned enterprises. Then, competition among the industry was eliminated, and as a result, the industry got weak in the business competition. We cannot deny that it was a cause of inefficiency in Brazil economy. Naturally, in order to increase the production immediately, it is necessary to raise the import of the parts and materials required from overseas suppliers.
And it led to increase the import to Brazil. Products that cannot be supplied by domestic production immediately, it has to rely on imports. As a result, the trade balance fell into a significant deficit, and combining a decrease in foreign exchange reserves, and with an increase in foreign investment. , then it accelerated hyperinflation. The import substitution strategy has a merit that growth of domestic industries.
However, if value-added could not be created as expected, lack of increase of exports in particular, significant imbalance of trade and reduction of foreign exchange reserves would be caused. Because the quality of the product in Brazil at the time did not reach the level it can be competitive in developed countries’ markets, it was limited to export the surplus that exceeded the domestic demand to overseas markets. It means that sales to developing markets in the neighborhood should be insisted mainly.
But these countries became unstable economic situation, so exporting to these countries were affected by the exchange rate especially. Sales volume and the balance of payment had also fluctuated. We can learn about it in the case of the trade with Argentina. In the case of the trade with a small country who has less consuming power, the potential to grow are also limited.
Compared with NAFTA and EU, it cannot be said to become the driving force for significant growth for Brazil. In addition, once the domestic industry will be matured, the growth speed becomes slower. After all, the growth rate would up to meet the growth date to domestic demand. The growth rate after satisfying those demands would become fast as the growth speed of their entire economy.
Miracle does not continue eternally. From these points of view, the import substitution policies should be applied under taking the certain level of protection policies but for companies, it is needed to maintain a competitive relationship with domestic and overseas market as far as we have the necessity to develop the industrial competitiveness. In post-war of Japan, Zaibatsu dissolution and requisitioned by the United States were carried out. And competitive relationship has been maintained based on the trade policy as a nation of Japan (protection policy).
It is an interesting point to compare. In the structure of the Cold War, exports of goods were the top priority because of special demands of military. Domestic industry successfully functioned as a processing factory itself.
It is one successful case of import substitution strategy. As a reaction to the rise of communism during the Cold War, the military regime from 1964 was directed to a superpower by large-scale investment through the state-owned enterprises. But as a result, it was only increased the debt of the public sector. That is, it was impossible for them to change the game. The added value of domestic industries was originally required to the Brazil economy, but the policies that relied on the currency devaluation, the expansion of FDI were different from the policies required. Depending on the industry, some of them were succeeded to open up overseas markets, and to establish the successful export-led business model.
They might have been able to mimic the success stories of these. However, in terms of the fiscal balance, [Brazil Cost], such as the high taxation, it comes from the traditional employment system and pension plans, harmed it. One of the factors in the downfall of the socialist countries is said to bureaucratic corruption and the evils of the social security system, which was separate from the economic principle of them. As a consequence, by the oil crisis over twice thereafter, the Brazilian economy was bankrupt, it was decided that lead to national bankruptcy de facto.
(But not actually) The decisive factor was sequential currency crisis, that is, improper of the value exchange foreign markets and domestic ultimately. Eventually, the protection policies such as tariff barriers for their protection, have demonstrated that it can contribute to bring the economy crash. In the TPP negotiations, agricultural sector of Japan has been discussed about. But it should be discussed “what should be the figure of the nation to aim”. <Ex. 2> Does the Mercosur agreement, solve Brazil’s problems?
If yes, why? If no, what are the alternatives? No. Mercosur is only the economical block to make their policies effective. The requirements in Brazil are not to create an economic block to make trade negotiations with NAFTA and WTO as backing Mercosur’s authority. As well as to open the home market, attract foreign capitals, let Brazil industries function as an export base! And they continue to make production and technology development, and to nurture the latest research and development forces.
Viewing the basic conditions of enough natural resources, progress of industrialization, quality of labor, increase of labor population, oil self-sufficiency, improved primary balance, strong consumer spending which accounts for 60% GDP, it is potential to success in bilateral negotiations. When there would be clarified benefits to each other, it is believed that they could coordinate the field to cooperate to grow. As the strength of Brazil, it is believed that JV with foreign capital, attraction of FDI can be relatively easier when compared with other countries, only if the economic situation would be appointed.
Reasons that; ? political stability, ? social stability, (the absence of privileged class, improvement of education level) ? no religious problem, no racial conflict. ?no conflict even though they have the border with 12 countries. ? market economy is functioning. Near the future, once the income gap and the unemployment rate could be controlled, social insecurity would get improved. The conditions that required to Brazil in order to counter the rise of countries in East Asia and Russia will be likely to satisfy foreign investors. Viewed from the population bonus, growth period in Brazil would be in coming 20 years.