In an interview with ‘Estadão’, Fiesp’s chief economist, Igor Rocha, comments on the future of Brazilian industry, the progress of the green transition and investments in the sector
In the global race towards a more sustainable development model, Brazil appears in a unique position to attract investments, says the chief economist of Federation of Industries of the State of São Paulo (Fiesp), Igor Rocha. “Few countries have this matrix of biodiversity and extremely clean energy, and at the same time have the capacity for commercial articulation with different nations”, he underlines in an interview with Estadao.
However, to fully exploit the new potential, the country must address old challenges. Rocha specifically cites poor infrastructure and structurally high interest rates. He also criticizes the Brazilian tax system, which disproportionately burdens the sector and, in his opinion, forces it to indirectly “subsidise” other segments. “This takes away a lot of efficiency from the economic system,” he argues.
The economist sees merit in the program New Industry Brazil, which provides 300 billion reais in subsidies and financing until 2026. But it believes the package is insufficient to address current distortions. For him, the government must advance industrial policies that promote areas with greater opportunities, including green hydrogen production and offshore wind energy.
Discover the main excerpts from the interview:
What is your evaluation of the Nova Indústria Brasil program?
It is an important program, because it places the manufacturing industry as a pillar of economic development. This is a sector that has been left aside for a long time and Brazil, with its low growth status, has paid the price. We were in the middle-income trap and unable to move up to the high-income country list. We have had a very strong deindustrialization precisely because we did not have a systemic and articulated planning vision regarding the role of the industrial sector. The program is in the process of designing objectives, which we are waiting for. More important than the objectives will be the monitoring of this plan over the years.
Is the program enough to increase productivity, historically one of the biggest challenges facing the Brazilian economy?
The project is a necessary condition, but not a sufficient one. There is an absurdly inadequate macroeconomic environment, especially in terms of taxes and interest for industry. Industry has to pay the highest tax burden in the economy compared to other sectors. This has become very clear now with the tax reform: several sectors have benefited from very generous exemptions and differential treatments, while industry has not. It is not surprising that these sectors have greater dynamism, because this incentive helps them gain productivity and growth. When the industry has to pay half the price to someone else, we are in a very unfavorable environment. This doesn’t just happen for tax issues. Tax reform has a great strength, which is transparency. Now the company will know who pays a lot, who pays little and who pays nothing. This will be very positive for the design of public policies.
The Central Bank has already started to slow down the rate of interest reduction and many economists already expect the Selic rate to remain above 10% for some time. How does this impact the industry?
The industry does not have a collection plan, nor an LCI (Real estate letter of credit)an LCA (Agri-Food Letter of Credit), an infrastructure bond, an incentive bond. There is no tool to cool the high structural interest rates that have remained in Brazil for a long time. The keynote of this time is equality. Why can’t we all pay the same tax burden, the same cost of credit? If this were not the case, and the industry were always to indirectly subsidize other sectors, it would begin to encourage a series of distortions in the economy. This takes away a lot of efficiency from the economic system. For example, our social capital is quite outdated. These are working machines that are 14, 15 years old. Nearly 40% of machines in use in Brazil have exceeded the manufacturer’s recommended usage time. Since the cost is very high, this renewal does not happen. This affects the productivity of workers. We see a brutal technology gap due to difficulty accessing capital. As a result, productivity also does not increase. These issues must be addressed in public policies – I also mean macroeconomic structural policies – to reduce the differences between segments, between different incomes, between different regions of the country, which generate an enormous loss of efficiency in the economic system.
What other challenges emerge most strikingly for the sector?
Another issue to address is that of infrastructure, which is still very lacking and takes away competitiveness for entering new markets. Investment has dropped significantly since 2015. It appears to be recovering now. Public investments must go hand in hand with private investments and infrastructure is a clear example of this. There is also the question of duties on imports: it would be important to work on a tax escalation model, that is, to associate tariffs with added value. What we have today in the Brazilian economy is a disincentive to adding value, because, if you want to add value, you pay more interest, you have a lower relative availability of credit, you pay more taxes and more import tariffs. Therefore, you need to have a proper incentive structure to add value.
How does this scenario explain the deindustrialization that Brazil has had to face?
Many of the sectors that Brazil has today that can be used are made up of well-designed public policies that generate opportunities for the industrial sector. Brazil’s deindustrialization was premature. As countries grow and become middle-income countries, it is natural that industry loses its share and begins to have a much more symbiotic movement with the service sector. Thus, the high-tech industrial sector begins to go hand in hand with sophisticated services. In Brazil there was a very strong technological regression, because deindustrialization came before the transition to high income. This has caused us to lose medium and high technology sectors, we did not plan this symbiotic and synergistic movement with the service sector. Furthermore, it has had an impact on income, employment and sustainable growth. This is very bad for the country.
What can Brazil explore to differentiate itself from other markets like China? Could the adoption of industrial policies be a way forward?
Industrial policy is public policy, not necessarily manufacturing policy. Industrial policy is any type of public policy that aims to transform a specific production structure. There have been industrial policies in the renewable energy sector, in agribusiness, in the creation of Embraer and Petrobras. Health policy also has an industrial policy connotation, because it involves various segments related to healthcare which are medium and high technology sectors. We also have advantages in fuel development, in sustainable aviation fuels, in new fuels, in green hydrogen. We also have the potential to develop offshore wind energy. All these opportunities have been promoted thanks to well-designed policies for these segments.
Why are these industrial policies particularly important for the manufacturing sector?
Industrial policy is associated with manufacturing for two reasons: first because it derives from the translation of the term into English, industrial policy. But also because it is the sector that has the greatest opportunities to generate jobs and income. This new revival of industrial policies around the world comes after they had been weakened for some time. Other forms of development of nations were also taken into consideration. But reality knocked on the door.
How can the industry take advantage of the energy transition process and Brazilian potential, particularly regarding green hydrogen, to gain competitiveness?
Since it has a very clean energy matrix, Brazil ends up being a significant power in attracting the so-called powershore. Obviously we have the potential NearShoring, because we are a friendly nation and trade with different nations. But we also have this advantage powershore which is not negligible. When it comes to powershore, in this sustainable transition, this ended up becoming a sort of new investment grade. And Brazil has a very unique role in this. Few countries have this biodiversity and an extremely clean energy matrix, and at the same time have the ability to trade with different nations.
Given these transformations, how can government and the private sector collaborate to provide adequate education and training for workers?
We have done a very positive job at Fiesp, which manages Sesi and Senai. The Sesi schools of San Paolo have already surpassed those of Pisa (International Student Assessment Programme) from Chile. It is very difficult to see another sector of the economy acting, like industry, in such a detailed and incisive way to improve education in Brazil. Sesi de SP is an efficient system to increase the productivity, skills and education of workers. The same thing is done with the Senai, which has a very significant role in new technologies, but also in professional training. This has been a hallmark of President Josué Gomes’ administration.
With neoindustrialization and growing concern about sustainability globally, how can Brazil address the “climate unemployed” – workers whose employment is affected by the transition to a green economy?
This does not only connect to the green question, but also to artificial intelligence. New professions and new courses are being created. Some things will cease to exist and others will be created. It is a new cycle, a new industrial revolution. We are faced with the new, in which sustainability is at the center and so is artificial intelligence. The industry provided this training, this exchange with what the outside world did. I don’t see it as green unemployment. I see that new professions and new opportunities are being created. I’m quite optimistic.
Source: Terra
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