Going Downhill? Some Notes on Brazil’s Deindustrialization and Economic Slowdown, by Marcos Degaut

After the euphoria caused by the news published back in December 2011 that Brazil had overtaken the United Kingdom to become the world’s sixth largest economy, Brazil’s modest economic growth over the past three years has brought the country back to reality and led to the resurgence of the age-old debate over the sustainability of the current development model.

In fact, Brazil’s GDP growth is experiencing a downward trend. After averaging 4.5% between 2005 and 2010, the country registered rates as low as 0.9% in 2012, and 2.3% in 2013, with an estimated 0.5% in 2014 [1]. The country’s GDP grew by an average 3.6% between 2000 and 2011, far behind other emerging powers such as China (10.2%) and Russia (5.3%). These modest numbers are much below the country’s needs and too little for a country which once aimed to rewrite the “economic geography” of the world, as former President Lula da Silva (2003-2010) used to say.

However, the truth is, there is nothing new in this issue. Already in 1862, over 150 years ago, Congressman Torres Homem protested against the lack of projects and proposals for fostering the creation and development of the Brazilian industry, and against our international insertion strategy, based on the export of primary goods from the agricultural or mining sectors: “It is thus needed that we content ourselves with living the humble lives of ordinary peasants or pastoral peoples, of coffee growers, sugar cane growers, or cotton growers, therefore perpetuating the childhood of society; and such is the state of those nations which, satisfied with their mediocrity, without any faith in their destinies, aspire to nothing else” [2].

In spite of the Congressman’s complaints, the agribusiness is still the driving force behind the Brazilian economy. Brazil ranks third among the world’s major agricultural exporters and fourth for food products. Total output and productivity growth in the sector are significantly higher than in the other sectors. The current international economic scenario, characterized by high commodities prices, helps to give even greater dynamism and importance to that economic segment. On the other hand, it seems that the industry is gradually losing relevance. During most of the 1980s, the manufacturing industry accounted for as much as 40% of Brazil’s GDP. That number fell to 27.8% in 2011, 26% in 2012, and 24.9% em 2013 [3].

This premature “deindustrialization” is responsible for the country’s growing economic weakness and its inability to effectively compete for international markets – or even the domestic market – with the products from other states. The structure of our foreign trade reveals the real Brazilian position in the world: nearly 70% of Brazilian exports are primary or semi-manufactures goods, that is, products with low added value [4].

There is an intimate relationship between the shrinking of the Brazilian industry and the country’s sluggish growth over the past few years. As vigorous as the Brazilian agribusiness can be, it has historically not been able to promote high economic growth rates. The possibility of adding value to primary goods is limited and these products tend to be highly susceptible to deteriorating terms of trade. Furthermore, at the macroeconomic level, the volatility in commodities prices usually has significant adverse effects, as it can lead to a “deterioration in the balance of payments and in public finances, and the associated uncertainty is likely to curtail investment and to significantly depress long-term growth” [5].

It is the industrial sector that, in its ceaseless quest for productivity and competitiveness, has the potential to bring more dynamism to the economy by creating, fostering, disseminating and accelerating the development and absorption of new organizational methods, production techniques and technologies whose “spillover” effects have remarkable potential value not only for a country’s industry, but also for consumers, exporters, and the public accounts.  It increases private sector productivity, it generates demand for new services and products, and it generates and increases income and employments. There seems to be little doubt that an economy that has little competitive industry is doomed to low growth, as the quality of capital accumulation depends on the performance of the manufacturing sector.

As a result of this lack of competitiveness, the level of economic activity in the country is experiencing downturns since the beginning of this year, according to the Brazilian Central Bank. The IBC-BR Economic Activity Index dropped to – 0.01% in February, – 0.24% in March, – 0.01% in April, – 0.8% in May, and – 1.48% in June [6], making the prospects for next year even more daunting, especially when one considers that the data provided show strong disacceleration in consumption expenditure growth, and savings and investment rates. It seems that Brazil has been unable to move from a growth model strongly based on consumption to one which increases domestic savings, and at the same time to ensure that inflation keeps to the target of 4.5%, as the inflation rate is expected to reach 6.5% in 2014.

Without industrial dynamism, Brazil remains largely dependent on commodities exports. As a consequence, the country ranked only 24 among the world’s largest exporters, with a modest share in world total exports of 1.32% (US$ 242 billion), much below China, the world’s main exporter with a share of 11.13% (US$ 2.05 trillion) [7]. Furthermore, after running a trade surplus for much of the past decade (see table 1 [8]), thanks to strong demand for its commodities from China, Brazil is once again starting to buy more than it sells abroad and is expected to run a trade deficit in 2014 [9].

Table 1 – Brazil Balance of Trade, US$ FOB

% Variation Over Previous Year






Total Trade




























































































Source: Brazilian Ministry of Development, Industry and Foreign Trade (MDIC).
* Numbers from January to July 2014.

It is not too much to remind that, as we have seen so many times in its recent history, Brazil, as a commodity exporter – and thus exposed to severe volatility in international commodities markets –, has faced successive and merciless currency crises, with devastating, long-lasting effects on the Brazilian society and on the country’s global power aspirations.

In practice, Argentina is the only large market for Brazilian manufactured goods, absorbing nearly 40% of Brazil’s manufactured exports, 45% of which are vehicles or automotive spare parts. The bilateral vehicle and auto parts trade between South America’s two largest markets is vital to both of them, reason why heavy governmental regulations in both countries protect the segment from competition from third countries.

While it is known that the Brazilian industrial sector suffers from lack of competitiveness, there are virtually no signs of a coherent and systematic national industrial policy. On the contrary, what can be seen is a host of diffuse and disconnected measures, which are sometimes contradictory and very often poorly elaborated. These measures tend to further deepen protectionism and to resort to currency devaluation, as a lever to improve their balance of trade, with little or no concern for productivity gains. To make things worse, the country’s infrastructures are still highly deficient. The quality of roads, port, air and rail infrastructures is very poor. Brazil ranks only 107 out of 144 countries in an infrastructure ranking, according to the World Economic Forum [10].

The country’s increasing reliance on protectionist measures has also contributed to substantially impede growth, and it concerns investors to such an extent that the International Chamber of Commerce ranked Brazil 67th out of 75 countries for openness to trade, foreign direct investment and infrastructure competitiveness. In the 2013 Index of Economic Freedom, a ranking designed by The Heritage Foundation, Brazil ranks only 100 out of 177 countries, which is certainly not good news, as some argue that economic freedom can exert a positive impact upon investment levels, entrepreneurial business activity, economic growth, and per capita income.

The mere expansion of credit, the adoption of protectionist policies and the continued allocation of state subsidies to a few select activities and a few politically connected corporations, for example, are nothing more than merely palliative, stopgap measures that do not bring a permanent solution to Brazil’s deindustrialization problem and that do not represent a global strategy based upon the full picture of the country’s economic situation. On the contrary, they have only contributed to prolong the agony and the decadence of the Brazilian industry. As they have been implemented, these measures have transferred income from the whole of the society to a few privileged groups. Most of the Brazilian society, however, remains condemned to consume lower quality, more expensive products. If Brazil does not start to seriously tackle the sources of its deindustrialization and economic slowdown, then its dreams of becoming a global power may in fact be only that: a dream, thwarted by the country’s own contradictions and short-sightedness.

[1] Brazilian Central Bank. Available in [http://www.bcb.gov.br/?ENGLISH].

[2] Author’s free translation from the Portuguese original.

[3] Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics).

[4] Brazilian Ministry of Development, Industry and Foreign Trade (MDIC). Retrieved from [www.desenvol vimento.gov.br/sitio/interna/interna.php?area=5&menu=4681&refr=1161]. Accessed on August 29, 2014.

[5] United Nations Conference on Trade and Development. Price Formation in Financialized Commodity Markets: The Role of Information. Unctad, New York and Geneva, June 2011.

[6] Brazilian Central Bank: June 2014 Economic Activity Index. Available at [http://www.bcb.gov.br/pt-br/ paginas/bc-divulga-ibc-br-de-junho-2014.aspx]. Accessed on August 29, 2014.

[7] Retrieved from [www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm]

[8] Brazilian Ministry of Development, Industry and Foreign Trade (MDIC). Retrieved from [www.desenvol vimento.gov.br/sitio/interna/interna.php?area=5&menu=4681&refr=1161]. Accessed on August 29, 2014.

[9] Retrieved from [http://www.tradingeconomics.com/brazil/balance-of-trade]. Accessed on 02/19/2014.

[10] Coface Group.  ‘Brazil’s Economy: Worrying Weaknesses?’ Retrieved from [http://www.coface.com/News-Publications/Publications/Brazil-s-economy-Worrying-weaknesses]. Accessed on 06/12/13.

Marcos Degaut is a Ph.D student in Security Studies at the University of Central Florida – UCF (mdegaut@hotmail.com)

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