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Challenges of Industrial Policy, Innovation and Competitiveness in Brazil

July 15, 2010 // 5:00pm6:15pm
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Latin American Program
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Brazil is positioned to play a more prominent role in the international economic geography, according to Luciano Coutinho, president of the Brazilian Development Bank (BNDES). At a July 15, 2010, seminar at the Woodrow Wilson Center, Coutinho discussed the various trends that are helping to shape this new scenario, and the role that Brazil and other large developing economies will play. "We are in a new world," Coutinho said, "and we have a relatively bright prospect for Brazil."

Coutinho emphasized that there has been a divergence between the developing and the developed world, with international economic growth being driven primarily by developing economies of Asia, Africa, and Latin America, which are growing an average of 3-4 percentage points faster than their developed counterparts. In addition to these new economic players, other trends such as the pressing need to address climate change, increased competition due to global economic integration, continued expansion of technology and innovation, and a recent recognition that the state and public policy have an important and potentially constructive role in economic performance--a consensus emerging in the aftermath of the global financial crisis--are helping to drive the global economy.

Fortunately, according to Coutinho, Brazil has a number of advantages to deal with these changes. Unlike many other emerging economies, Brazilian society has solid institutional and political stability, as made evident by the lack of anxiety surrounding the upcoming presidential elections. He also highlighted Brazil's well-designed fundamental economic policy, strong currencies to support the exchange rate, a diversified economy driven by several different vibrant sectors, and a low risk that demand will taper off.

Nevertheless, Coutinho pointed out that there remains a number of challenges that Brazil as a whole, including the BNDES, still needs to address, such as a deficient infrastructure (after years of underinvestment), giving rise to bottlenecks that harm productivity. In addition, he addressed the need to integrate innovation more deeply into private business strategies, especially among the entrepreneurial class. Finally, he mentioned the need to expand economic and social inclusion, a stubborn problem, not only through direct income redistribution but primarily through the creation of jobs in the formal sector, which provide tax revenues and other benefits such as social security.

When looking at Brazil's growth prospects, he highlighted the important role of domestic demand, which has become the leading driver of economic growth and appears to continue to be expanding. This, he said, will help the country maintain growth levels of around 5 percent (after reaching a high of over 9 percent at the beginning of 2010). This depends, however, on investment, of which the BNDES is a leader. He said the country is moving toward a ratio of investment to GDP of around 20 percent, but argued that this could be, and hopefully will be, even higher, noting that the "BNDES is a privileged [observer] of investment trends." On all accounts, the engines of this growth and the primary beneficiaries of increased investment are the oil and gas sector--Petrobras having the highest capital investment of any major oil company in the world; the agribusiness sector, which is currently taking advantage of Asian demand; housing, which could potentially triple in the near future; and hydroelectric and other renewable sources of energy has demand for energy rapidly increases. Meanwhile, if the domestic market remains strong, Coutinho sees no major threats to increased economic growth.

Finally, he discussed the role of the Brazilian government in this growth. He pointed out that the regulatory structures, criticized as being outdated, shielded Brazil from the 2008 global financial collapse and helped the country recover remarkably fast from the crisis due their centralization, which allowed for a quick, coordinated response. Furthermore, public banks, such as the BNDES, are an effective source of countercyclical investment, injecting money into the economy when the private sector is contracting. He argued that the BNDES primary channel for this, through investment (rather than direct current expenditures) is more efficient in the long-term because the investment is eventually returned – and since the BNDES is "much bigger than the World Bank or IDB [in disbursements]," there is potential for an enormous amount of new investment.

Looking towards the future, he urged the government to work to reduce public debt, which is much easier to do during periods of growth and provides room to maneuver during more troubled economic times; and to prioritize investment, lauding previous efforts made in technology and science innovation, education, and public health. In conclusion, he stressed both the need for continuing reform, but also the bright future and solid foundation from which Brazil has to work. In response to a question from the audience, Coutinho argued in favor of "a reduction of the public sector deficit to 30 percent of GDP, or below that." It is above 40 percent. He also highlighted the importance of controlling the country's current account deficits in the coming years.

By J.C. Hodges
Paulo Sotero, Brazil Institute

 

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