# Routledge Handbook of Brazilian Politics

Print publication date:  October  2018
Online publication date:  October  2018

Print ISBN: 9781138684454
eBook ISBN: 9781315543871

10.4324/9781315543871-26

#### Abstract

This chapter examines the resurgence of industrial policy in Brazil, with special attention to three successive industrial policies adopted by PT governments between 2003 and 2016: Pitce, PDP, and Brasil Maior. The Brazilian National Development Bank was central to all industrial policies and pursued additional policies to promote national champions and help Brazilian firms expand abroad. A fuller understanding of these policies requires close attention to the structure of big business in Brazil, as well as the evolving relationship between the state and the private sector.

#### Introduction 1

In the 2000s, several Latin American governments returned to sectoral promotion and industrial policy (Peres 2006; Peres & Primi 2009). After the new government of the Workers’ Party came to power in 2003, Brazil stood out in the region for a series of new industrial and innovation policies. In some respects, these new industrial policies resembled policies of pre-1980 state-led development in Latin America. However, the post-2000 context of economic and political liberalization meant that most policies differed from earlier experiences, as well as from industrial policies adopted elsewhere.

Brazil’s experience with industrial policy in the early 21st century, as with previous policies in the 20th century, only partially and occasionally fits with recommendations for best practice drawn from theory and major successful cases in East Asia. 2 Alice Amsden was one of the first to draw general policy lessons from the Asian experience. For Amsden (1989, 2001), successful late industrialization was closely linked, for two main reasons, to the formation of large, domestic business groups. First, industrial policy in the 1960s and 1970s promoted capital-intensive sectors (steel, petrochemicals, shipbuilding, transportation equipment) with large economies of scale. To be competitive, companies in these sectors had to be large. Second, companies grew through diversification into unrelated industries, forming large business groups, partly through learning in project execution that involved planning, construction supervision, identification of suppliers, and technology transfer (economies of scope; Amsden 2001, p. 197).

In Amsden’s (2001) analysis, the success of industrial policy in countries such as South Korea and Taiwan, compared with countries such as Brazil and Mexico, is explained in part by the success of Asian countries in creating competitive business groups. 3 Some industrial policies in Brazil – especially the BNDES (Banco Nacional de Desenvolvimento Econômico e Social) promotion of national champions – did support the formation of huge corporations. However, in contrast to Korea, this BNDES promotion was less tied to diversification and more focused on expansion abroad, with uncertain and indirect benefits for development at home.

Most importantly, industrial policies in Brazil did not include crucial measures that Amsden considered indispensable for success: performance standards and reciprocity (Amsden 1989, 2001). Amsden argued that industrial policies in Korea came with explicit standards that firms had to meet (as in export targets), and, if firms did not meet the standards, then the government would reduce subsidies and support. This was the core of reciprocity – firms would receive massive subsidies, but only if they performed. In Brazil in the 2000s, some policies set explicit sectoral or national economic targets, but macro targets could not be used to enforce reciprocity with individual firms that received subsidies.

For Rodrik (2007) and others, a core development problem is that it is costly for firms to discover what new products they can produce efficiently. As a result, industrial policy should subsidize this discovery process. 4 Policies to promote discovery should be as horizontal as possible, with performance requirements and monitoring criteria. In addition, “the government challenge is not picking winners, but knowing how to identify when there are losers” and discontinuing their incentives (Rodrik 2007). In Brazil, in contrast, few policies had built-in evaluation and monitoring. Like even the most successful cases, industrial policy in Brazil did back some losers (e.g., the business empire of Eike Batista). However, this became apparent only when the firms went bankrupt, rather than through a systematic process of monitoring and evaluation.

For Peter Evans (1995), success lies less in the industrial policies themselves and more with the character of the policy makers and their interaction with business. Policies succeed under conditions of “embedded autonomy,” where autonomous, professional (Weberian) bureaucrats make and implement policy in close collaboration with business. 5 There were occasional glimpses in Brazil of something like embedded autonomy involving Weberian bureaucrats in the BNDES, Petrobras, and other agencies in policy councils with business. But, for the most part, policy was made by political appointees in isolation from regularized interaction with business. Where business–government collaboration was most thoroughly developed, sadly, it took the form of old-style demand from entrepreneurs for subsidies and protection from international competition, or it evolved into the massive corruption networks uncovered by investigations in the 2010s.

Finally, the Washington consensus came around in the 2000s to guarded support for low-voltage industrial policy. Among other recommendations, various policy documents recommended horizontal over vertical policies (Crespi et al. 2014) and targeting vertical policies to areas of latent comparative advantage (Lin 2012). In partial contradiction to Rodrik and others who emphasize the challenge of self-discovery, Lin and others urged policy makers to invest in areas related to activities where countries were already internationally competitive. The policy trajectory in Brazil by the late 2000s mostly conformed to this approach. The first policy, Pitce, targeted for support areas such as pharmaceuticals and software where Brazil had only weak capacity, but later policies, especially national champions, provided support in areas where Brazil was already very competitive, such as mining and food processing.

Understanding the forms industrial policy has taken in Brazil requires careful attention to the political and economic context. Brazil has a long history of industrialization, starting in the early 20th century. By the end of the 20th century, the industrial sector was complex, sophisticated, and internationally competitive in many sectors. Incubated behind tariff barriers, industry was subjected, after 1990, to market liberalization and integration into the world economy. On the political side, the return to democracy in the 1980s subjected policy making to new institutional rules and pressures from various political and social groups. This general context of economic and political opening led to several specific pressures on the formulation of industrial policy.

First, the government used policy making to generate support from key constituencies of business and workers (the PT had strong roots in the unions of the industrial sectors of São Paulo). So, politicians had incentives to support existing industries (rather than promoting new industries). Moreover, the electoral cycle encouraged the short-term design and implementation of policies, with each new government offering new policy packages and promising results by the end of the government’s term.

Second, industrial policies needed to try to conform to the restrictions of the World Trade Organization (WTO; although they were unsuccessful in some cases) and other international institutions and treaty obligations and to find ways to work with or around the hundreds of large MNCs that were well established in Brazil. Many policies thus made no distinctions between national and foreign firms. However, efforts to promote national champions and the internationalization of Brazilian firms clearly excluded MNCs.

Finally, big business in Brazil is well articulated in the new democratic political system through a variety of channels, including strong industrial associations, personal connections to top government ministers (some from industry), campaign finance, and corruption. In addition, PT governments created several public–private councils that included representatives from business (e.g., the Council for Economic and Social Development, or CDES). The political incentives for policy makers were to steer industrial policy towards helping existing firms and away from imposing individual monitoring and performance standards. Big business overall found little to complain about, as the government vastly increased its spending on industry. By the mid-2010s, total subsidies to firms amounted to 4.5 percent of GDP, up from 3 percent in 2006 (Dutz 2018).

The PT’s revival of industrial policy generated heated debates over whether the policies of the 2000s constituted a new developmentalism or were merely old wine in new bottles. This chapter does not engage in these debates, although we generally come down more on the continuity side. 6 Although the context of policy making had clearly changed, and new areas of social policy had greatly expanded, the targets of industrial policy and the instruments used were largely similar to those of the 20th century: massive subsidies through cheap credit provided by the BNDES to huge existing firms, including SOEs (state-owned enterprises).

In the wake of the Lava Jato and related investigations that started in 2014, it is impossible to discuss policy making in PT governments without reference to corruption. Was corruption so massive that it overshadowed any impact that industrial policy might have had? The short answer is, in part, in some sectors more than others, but not completely. In comparative terms, corruption has been widespread in most successful developmental states, including Japan, Korea, and China (see Kang 2002). However, in these success stories, corruption was largely confined to areas of the economy such as agriculture and housing that were not core targets of industrial policy. In Brazil, core areas, such as local content in the oil and gas supply chain, were subject to kickbacks and corruption, although at a lower rate than in areas such as construction (Lima-de-Oliveira 2017). However, areas such as ethanol, agribusiness, software, and others were not, as far as we know so far, so compromised. Overall, then, corruption would certainly have dulled the signals sent by industrial policy – because new public funds could be had by means other than following policy guidelines – but they were not fully overshadowed. We return to corruption in the fourth section of this chapter.

The rest of this paper proceeds in three steps. The next section examines the resurgence of industrial policy in Brazil and Latin America, with special attention to three major industrial policies adopted in Brazil after 2003. The third section discusses BNDES’s promotion of national champions and international expansion, and the fourth section discusses the relationship between state and big business.

#### The Return of Industrial Policy in Brazil

Industrial policies in Latin America can be divided into three groups (Peres 2006). The first group includes sectoral policies that, in many cases, represent a continuation of policies adopted during the period of import substitution in order to increase the competitiveness of existing industries. The incentives for the automobile sector in Brazil and other Latin American countries are part of this group, along with other sectoral incentive policies aimed at labor-intensive industries.

A second group of sectoral policies are neo-Schumpeterian (Peres & Primi 2009, p. 22; Suzigan & Furtado 2006, pp. 164–165; Dosi 1988). These policies emphasize the strategic role of innovation in economic development, highlighting knowledge as tacit and largely dependent on an institutional environment that fosters innovation. According to this view, the market does not necessarily generate sufficient resources for activities that are intensive in knowledge and innovation. Therefore, the government should employ incentives to shift relative prices to make investment in technology-intensive sectors more attractive. Neo-Schumpeterian policies promote the creation of more technology-intensive sectors such as software, information and communication technologies (ICTs), and biotechnology.

The third group of industrial policies adopted by Latin American countries targets sectors that were privatized in the 1990s, sectors in which the state shifted from direct producer to regulator. These sectors are capital intensive with increasing returns to scale: energy, telecommunications, natural gas, and oil. Industrial policy for these sectors is linked to the development of a regulatory environment that encourages public and private investment. Some governments even renationalized these sectors (Venezuela, Bolivia, and Argentina), and others greatly expanded role of government. Examples include the government of Ecuador and even the Brazilian government through specific regulations for oil exploration in the pre-salt layer that, in 2010, granted a monopoly of operation to Petrobras (partially revoked in 2016). 7

Table 25.1 summarizes the three types of competitiveness promotion adopted by Latin American economies.

### Table 25.1   Three Types of Industrial Policy in Latin America

Policy Type

Objective

Examples

Sectorial promotion

Increase the competitiveness of existing industrial sectors and create new links in the productive chain

Automotive, textile and clothing, etc.

Encourage innovation and new dynamic sectors (neo-Schumpeterian)

Foster innovation and creative sectors in technology and/or knowledge-intensive activities

Pharmaceuticals, biotechnology, software, nanotechnology

Regulation

Improve the regulatory environment

Energy, telecommunications, oil and gas

Source: Peres (2006).

In sum, Brazilian authors in the 2000s were skeptical about the possibility of adopting an industrial policy aimed narrowly at promoting new innovative activities in the most dynamic and technology-intensive sectors. This skepticism is congruent with the shift of the first Lula government’s industrial policy – adopted in 2004 with a more neo-Schumpterian focus – to a more comprehensive policy adopted in 2008 and the industrial policy of the Rousseff government (2011–2016), the Greater Brazil Plan, adopted in 2011.

#### Lula Revives Industrial Policy: PITCE (2003–2007)

After Lula’s inauguration in 2003, a working group started designing a new industrial policy. This group comprised mainly academics linked to the University of São Paulo (USP). A sociologist from USP, Glauco Arbix, led the team. They were heavily influenced by the neo-Schumpeterian idea of developing new technology-intensive sectors and increasing fiscal and financial incentives to spur innovation and promote exports. However, within the government, this working group could not push the strategy of high-tech diversification too far owing to resistance from the more orthodox members of the overall economic team.

In President Lula’s first term, he nominated one of his closest advisors, Antonio Palocci, as minister of finance. Palocci had a rocky start. Besides lacking training in economics (Palocci was a medical doctor), he became minister at a particularly sensitive time. Financial markets were skeptical of the newly inaugurated left-wing government, and inflation rates were bouncing back to two-digit levels owing to a 60 percent depreciation in the exchange rate between 2002 and 2003. In this context, Palocci did not want to risk promoting a radical change in economic policy. His first priority was to regain the confidence of financial markets in the new government rather than promote new industrial policies. 8 With this priority in mind, Palocci nominated conservative, US-trained economists (Marcos Lisboa and Joaquim Levy) to occupy top positions in the new economic team. He invited a former treasury secretary, Murilo Portugal, who had been working for IMF, to be his top advisor, and Lula appointed a former president of the Bank of Boston, Henrique Meirelles, to head the Central Bank. This economic team was not sympathetic to industrial policies in general, which helps explain why much of the industrial policy of the first Lula government was more market friendly and focused on horizontal innovation, with some attempts to target high-tech sectors.

In 2004, the government launched the Industrial, Technological and Foreign Trade Policy (Política Industrial, Tecnológica e de Comércio Exterior, PITCE). PITCE worked on three axes: (1) horizontal lines of action (innovation and technological development, external insertion/exports, industrial modernization, and institutional environment); (2) promotion of strategic sectors (software, semiconductors, capital goods, pharmaceuticals); and (3) support for future-leading activities (biotechnology, nanotechnology, and renewable energy). 9

The group of academics behind PITCE knew that a policy to promote innovation and build comparative advantages in technology-intensive sectors could not be evaluated in the short term. Therefore, the group was more concerned with improving the legislation to promote innovation than on setting short-term performance requirements to evaluate the success of the policy. In addition, policies to support horizontal innovation were the only common ground between the industrial policy group and the Ministry of Finance’s conservative economic team, more concerned with institutional reforms than industrial policies. PITCE was a middle ground between the industrial policy group and the economic team of Minister Palocci. The academics behind PITCE focused on what they could achieve more effectively with the support of the economic team, especially promoting two important legislative changes toward supporting innovation (the Innovation Law (Lei da Inovação) of 2004 and the Good Law (Lei do Bem) of 2005; see Pacheco 2018).

The Brazilian Constitution enacted in 1988 established, in articles 218 and 219, that the government must promote investment in science, technology, and innovation (ST&I). Still, the government lacked the tools to promote ST&I. PITCE solved this problem by putting in place new legislation in order to make possible a more active governmental role in supporting ST&I. The Innovation Law of 2004 promoted private–public cooperation between business and universities to do joint research, allowed researchers in public universities to benefit financially from successful innovations in these joint research projects, and set up a program for public grants to promote the innovation efforts of private enterprises according to the priorities set in PITCE. 10

The other important legislative change promoted by PITCE was the Good Law of 2005. Before the Good Law, firms had to fill out many forms, submit a project to the Ministry of Science, Technology and Innovation, and then wait for the Ministry’s approval of fiscal incentives for investing in R&D. With the new law, firms no longer had to submit projects for prior approval and could just deduct eligible R&D expenses from their taxes. In addition, the government reduced taxes on software firms whose exports accounted for at least 60 percent of total revenue, and the government started a new program to pay between 30 percent and 60 percent of the salaries of researchers working in R&D.

Despite PITCE’s various programs, these efforts did not show up in the aggregate indicators of innovation. Private firms in Brazil did not increase the percentage of total revenue spent on R&D (3 percent of firms’ total revenue), and firms in the industrial sector only slightly increased their R&D efforts: 0.62 percent of the industry’s total in 2006–2008 versus 0.57 percent in 2003–2005 (PINTEC edition for 2006–2008). Although the proportion of firms that innovated increased from 33 percent in 2003–2005 to 38 percent in 2006–2008, this growth came mostly from catching-up efforts by industrial firms (innovation of product and process), as the rate of innovation for new products and processes for the market in 2006–2008 was similar to that in the 1998–2000 PINTEC edition. Worse, in more recent years (2012–2014), the innovation rate dropped to 36 percent.

### Table 25.2   Percent of Manufacturing Firms that Introduced New Products or Processes, 1998–2014

PINTEC

New Product for the Firms (a)

New Product for the Domestic Market (b)

New Process for the Firm (c)

New Process for the Domestic Market (d)

1998–2000

17.6

4.1

25.2

2.8

2001–2003

20.3

2.7

26.9

1.2

2003–2005

19.5

3.2

26.9

1.7

2006–2008

22.9

4.1

32.1

2.3

2009–2011

17.3

3.7

31.7

2.1

2012–2014

18.3

3.8

32.7

2.6

Source: Survey of Technological Innovation (PINTEC) – IBGE.

Policies to promote R&D and innovation naturally take time to have full effect. However, despite clear improvements in legislation for the private sector, complementary policies to back up the industrial policy were lacking, and the state’s effort to spur innovation did not show up markedly in R&D indicators or in the increase in the private share of R&D. Although the increase in total R&D from .9 percent of GDP in 2004 to 1.16 percent in 2010 was substantial, the 2010 figure was not so much higher than the 1.04 percent registered in 2001 (Figure 25.1). Moreover, the private share of total R&D remained stable at around 45 percent.

Figure 25.1   Government and Private Shares of R&D Spending (percent of GDP).

Source: Brazilian Ministry of Science, Technology and Innovation

In addition, although PITCE supported innovation in many economic sectors (horizontal policy), politicians and business associations demanded additional policy measures to boost short-term investment in labor-intensive sectors, such as footwear, textiles, clothing, and furniture, all major employers in Brazil (Landim, 2004). Partly in response to these demands for a more comprehensive industrial policy, the government decided in 2008 to launch a second industrial policy, the Productive Development Policy (Política de Desenvolvimento Produtivo, PDP).

#### Productive Development Policy, 2008–2010

The PDP followed along the lines already mentioned and suggested by Fleury and Fleury (2004), which included policies from incentives to maquiladora companies to the creation of technology-intensive sectors. This pragmatic idea of multiple policies may be what is behind the PDP, a new industrial policy adopted by the government in 2008 and praised by the Federation of Industries of São Paulo (FIESP) because it aimed at supporting economic output and exports across many sectors (see section 2 in FIESP 2008).

A reshuffling of the economic team made possible this new, pragmatic and encompassing approach to industrial policy. Palocci’s involvement in a political scandal forced his resignation in 2006. The then-president of the (BNDES), Guido Mantega, a developmentalist economist affiliated with the Worker’s Party (PT), became the new minister of finance. In 2007, at the beginning of Lula’s second term, Luciano Coutinho, another well-known developmentalist economist and a strong advocate of industrial policy, was appointed to head the BNDES, and he brought in another developmental economist, João Carlos Ferraz, who was working at CEPAL.

Coutinho and Ferraz had worked closely together in the early 1990s when they coordinated a research project on Brazil’s industrial sector (see Coutinho & Ferraz 1994), and they shared with Mantega the idea that development requires a strong industrial sector, the formation of domestic multinationals, and a more active role for state banks in promoting industrial development. In contrast to Lula’s first term, the economists in the Ministry of Finance, the BNDES, and in the public agencies in charge of designing the PDP were mostly like-minded. From its conception, therefore, the PDP was a comprehensive and ambitious industrial policy targeting many sectors and with additional support of the BNDES for individual firms’ strategies of internationalization and domestic mergers and acquisitions (see Coutinho et al. 2012).

According to the government, a major innovation of the PDP was the establishment of a set of goals for 2010 that could be easily monitored. These goals, according to the briefing document of the PDP, had “the purpose of indicating, clearly, the meaning and scope of the PDP, acting as an element of coordination of expectations in the Brazilian economy and, in a subsidiary role, to allow periodic monitoring of policy outcomes.” The major goals of the PDP were to increase:

• the investment rate from 17.6 percent of GDP in 2007 to 21 percent in 2010;
• private spending on R&D from 0.51 percent of GDP in 2005 to 0.65 percent in 2010;
• Brazil’s share in world exports from 1.18 percent in 2007 to 1.25 percent in 2010; and
• the number of micro and small enterprises (MSEs) that export by 10 percent.

Although setting targets and deadlines was a positive addition, these aggregate targets were not much help in monitoring the behavior of subsidy recipients as in Amsden’s formulation of reciprocity. Moreover, the goals of the PDP were all short term and coincident with the election cycle, whereas many of the changes expected of industrial policies can only be evaluated in the long run. The electoral calendar is one element of democracy that clearly complicates the establishment of realistic performance targets (and, by extension, clear expectations on reciprocity for firms receiving subsidies), as governments can only establish goals for their terms in power. Ultimately, although the PDP established a number of major targets (with the exception of the modest target of R&D spending), these targets did not help in the evaluation of industrial policy, and none were met (FIESP 2011).

Assessing the PDP is difficult, because the government implemented it during the financial crisis after 2008. Despite countercyclical stimulus policies, GDP contracted 0.3 percent in 2009, and the investment rate declined from 19.4 percent in 2008 to 19.1 percent in 2009, before bouncing back to 20.5 percent in 2010, near the target of 21 percent of GDP set in the PDP. Moreover, as Brazil outperformed most of the rest of the world, the Brazilian economy began to attract more portfolio and direct investments, which together with a surplus trade balance resulted in a sharp appreciation of the real and sparked the debate on whether Brazil was deindustrializing despite the industrial policy. In reaction to the perceived premature deindustrialization, the Federation of Industries of the State of São Paulo and the largest labor union federations of the country launched a document in early 2011 with economic proposals (particularly industrial policy instruments) that reflected an agreement between industrialists and workers’ unions (FIESP et al. 2011). It is precisely owing to the adverse macroeconomic situation, and in reaction to the calls from various economic sectors, that the Rousseff government adopted a new version of industrial policy called the Greater Brazil Plan, the third industrial policy since 2003. To Singer (2015), the plan met fully the demands of industrialists and workers, and it helped seal the support of a new political coalition for Dilma Rousseff, who at the time was picking fights with the financial sector by pressuring for a steep reduction of interest rates.

#### The Greater Brazil Plan: 2011–2014

Unlike its predecessor, which was implemented in a period of growth in the rate of investment and industrial production, the Greater Brazil Plan was adopted during an adverse situation for industry. Industry was declining as a share of GDP and of exports, whereas imports of manufactured products were growing. Three facts stand out in data on Brazil’s foreign trade in that period. First, from 2002 until June 2011, the share of commodities in total exports increased from 28 percent to 48 percent, whereas the share of manufactured goods declined from 55 percent to 37 percent. This change in the composition of exports resulted largely from the growth of trade with Asian countries, as 77 percent of Brazil’s exports to that region were commodities. Second, the growth of commodity exports was linked not only to the fact that Brazil had comparative advantages in producing these products, but also to the strong increase in prices in the 2000s. From January 2003 to July 2011, the price index of commodity exports estimated by FUNCEX increased by 276 percent, and the quantum index increased by 136 percent. Thus, the growth of the export value of commodities, from US$21 billion in 2003 to US$90 billion in 2010, was due more to prices than quantity (Almeida 2009). 11

The Greater Brazil Plan increased incentives for production growth and employment in many productive chains. Like its predecessor, the PDP, the Greater Brazil Plan sought to encourage a variety of industrial sectors. However, the Greater Brazil Plan differed from earlier industrial policies in relying more on trade protection. In particular, the government doubled the federal excise tax on automobiles that did not have at least 65 percent domestic content, increased the import tax on cars, and increased import tariffs on 100 products. Rather than emphasizing the effort to promote more spending on R&D and innovation, the words most heard in the release of the Greater Brazil Plan during the speech by the minister of finance were “unfair competition,” “crisis in the world market,” “predatory competition,” “currency war,” and “Brazilian industry should reap the benefits of a booming domestic markets instead of outside adventurers.” In many respects, this set of industrial policies was more defensive and designed to shield existing industry from the global economic slowdown and currency overvaluation. Finally, just as the PDP before it, the targets for Greater Brazil were all short-term targets for 2014, the end of the Rousseff administration’s first term.

Another point in common between PDP and the Greater Brazil Plan is that the economic team behind these two policies was the same. But the Dilma government took a more protectionist turn in 2011, as manufacturing output stagnated, and manufactured imports boomed. The consensus in the government was that external circumstances had changed for the worse, and the government therefore had to adopt a more comprehensive set of defensive policies not only to promote industrial sectors, but also to shield industrial output and employment in labor-intensive sectors from international competition. In addition, the Greater Brazil Plan enlarged the set of policies promoting industry by establishing new legislation for public procurement, allowing the government to pay up to 25 percent more for domestic products in the textile, footwear, health industry, information technology, and telecommunications sectors. The local content policy was reinforced in the oil, automobile, and wind-turbine sectors. 12

However, the most important instrument in both PDP and the Greater Brazil Plan was the strong role of BNDES in supplying subsidized credit (Armijo 2017). From 2008 to 2012, the Brazilian Treasury increased the debt by more than US$150 billion (about 9 percentage points of GDP) to lend to BNDES so that the bank could support investment in the industrial sector, finance exports, and increase infrastructure investments. The idea of having a strong state bank providing subsidized credit for all sectors and also acting as an investor in some large firms preempted any criticism the bank and the government might receive from potential beneficiaries of industrial policy. From a political point of view, the advantage of both PDP and the Greater Brazil Plan was their large scope, which increased support despite their low effectiveness in solving specific market failures and promoting diversification and innovation. The Greater Brazil Plan was more protectionist than the earlier versions of industrial policies adopted after 2003, but this protectionism was not linked to the infant industries argument or a strategic vision of promoting high value-added exports. Rather, the protectionist wave was linked to policy makers’ intense efforts to shield domestic industry from international competition in an environment then marked by near full employment, excess supply of manufactured goods in the world, and increasing domestic wages that industrial firms, unlike service sector firms, could not transfer to prices. But, as many prominent Brazilian economists pointed out at the time, higher protectionism can backfire on an industry’s competitiveness, as Brazil’s major imports are capital goods and inputs for industry (Bacha & Bonelli 2012). Furthermore, and as evidence of how defensive and short term the Greater Brazil Plan was, policy makers were aware that the measures discriminating between the taxation of domestic and imported products were against WTO rules. However, the Brazilian government enacted them on a temporary basis for two years, subject to renewal, calculating that any opening of a panel in the WTO would take longer than two years. Such calculation proved correct, as the first WTO panels against specific programs in the Greater Brazil Plan were only opened in 2014, driven by complaints made by Japan and the European Union. By 2017, the WTO had ruled (mostly) against Brazil’s industrial stimulus programs favoring domestic production, particularly in the automobile sector with the Inovar Auto program, applying pressure to phase it out (see WTO 2017). In sum, in less than a decade, Brazil went through three different sets of industrial policies. The first of these, PITCE, was the most consistent and enduring in establishing new federal laws to increase incentives for firms to invest in R&D. The later versions of industrial policies enlarged government support to almost every industrial sector. Such broadening was supported by industrialists and workers (e.g., FIESP et al. 2011; ABIMAQ 2011), who called for government support against the perceived premature deindustrialization of the country. These policies innovated in setting macro targets in an apparent attempt to improve accountability, but the targets were too broad, short term, and ultimately inadequate to evaluate the policies or monitor and sanction firms receiving public subsidies. #### Further Paradoxes in Brazilian Industrial Policy #### Consolidation versus Diversification Industrial policy is usually designed to create new comparative advantages. However, in Brazil, from 1996 to 2011, there were no major sectoral changes (Table 25.3). The most competitive industrial sectors in 2011, measured by the trade surplus, were the same as in 1996, despite successive industrial policies’ efforts to promote technology-intensive sectors. The only change among the four sectors of highest trade surplus was the replacement of textile, leather, and footwear in 1996 and 2000 by the item non-industrial products (which includes mineral products, agricultural products, crude oil, and building services). Some effects of recent industrial policies may take longer to appear. For now, however, the pattern of world trade, driven by greater integration of China, enhances and consolidates the current Brazilian productive structure, a structure focused on exports of low-technology goods. ### Table 25.3 Most Competitive Sectors in Brazil by Technological Intensity (Trade Balance in US$ billions)

1996

2000

2008

2011

Food, beverages, and tobacco (low tech)

6.5

5.7

31.3

22.9

Non-industrial products

–5.0

2.4

26.0

42.9

Metal products (medium–low technology)

4.7

4.1

11.2

5.1

Wood, paper, and pulp (low tech)

1.5

2.8

6.6

3.9

Subtotal

12.2

14.9

75.1

74.8

Source: MDIC.

Industrial policy, rather than offsetting this demand effect, actually strengthened it by stimulating the concentration and internationalization of commodity and lower-technology companies. Eight of the ten largest loans made by BNDES to industrial sectors in 2008 were in low and medium–low technology, with a clear predominance of credit to promote internationalization (e.g., food companies; Almeida 2009, Appendix 1). In 2009, despite greater diversification in loan disbursements, sugar cane mills and food processing companies were still among the top 10 loan recipients (Almeida 2009, Appendix 2). In addition, in Table 25.4, it can be seen that, instead of diversifying its loans to new and emerging sectors, the BNDES has focused lending on the sectors in which Brazil is already competitive.

### Table 25.4   Sectoral Composition of BNDES Loans to the Manufacturing Industry (2003–2010; percent)

2003–2006

2007–2010

Food products

11.5

18.3

Beverages

1.4

1.5

Pulp and paper

6.2

4.4

Coke, oil and fuel

1.7

22.9

Chemistry

4.5

5.5

Metallurgy

6.3

8.4

Others

68.4

39.0

Source: BNDES.

Summing up, sectoral competitiveness did not change after the mid-1990s. The pattern of insertion of Brazilian companies into the world market was grounded on resource-based industries and commodities, areas of Brazil’s greatest comparative advantage. Various aspects of government policy, especially BNDES lending, reinforced this trend. The next section discusses a second paradox of industrial policy, namely the challenge of encouraging innovation in an economy with a high stock of foreign direct investment (FDI).

#### Nondiscrimination in Fostering Innovation and Discrimination in Promoting National Groups

Most countries in Latin America welcomed FDI during import substitution industrialization (ISI), especially from the 1950s on (Amsden 2001). By 2007, the stock of FDI in Brazil was US$329 billion (24 percent of GDP), slightly more than half of all FDI in South America (US$649 billion; UNCTAD 2009). The stock of FDI in Brazil is much higher than in other countries that made ​​use of industrial policies but controlled the inflow of FDI – countries such as Japan, Korea, India, and China (Table 25.5). Outside Southeast Asia, many Asian countries controlled the inflow of FDI and only relaxed restrictions later in the industrialization process. Even when FDI was less constrained, MNCs invested less to compete directly with domestic firms and more in complementary activities. In other cases, governments required MNCs to form joint ventures with domestic firms to facilitate the transfer of technology, something that China continues to do (see Tan 2018).

### Table 25.5   Stock of FDI in Selected Countries (2007; percent of GDP)

 Japan 3 Venezuela 19 India 7 Uruguay 22 China 10 Brazil 24 Korea 13 Argentina 25 Taiwan 13 Thailand 35 Mexico 30 Malaysia 43 Colombia 34 Singapore 160 Chile 64 Hong Kong 577

The auto industry in Brazil provides a good illustration of the dilemmas of industrial and technology policy in sectors dominated by MNCs. Since its establishment in the 1950s, the auto industry has received extensive government support. Even in the liberalizing 1990s, the industry relied on tariff protection and a series of tax incentives from the federal government, the BNDES, and state governments attracted new assemblers from Asia (Kia, Toyota, Mitsubishi, and Honda) and Europe (Mercedes-Benz, Peugeot, and Renault). According to Salerno et al. (2004), industrial policy for MNCs with long supply chains, such as autos, should focus on encouraging MNCs to let local subsidiaries control the design, engineering, and product management of some product lines. The promotion of small cars (those under 1 liter displacement) led to more product design and control in Brazilian subsidiaries. Nevertheless, 69 percent of carmakers in Brazil are adapting products, and only 23 percent of them invest in design (Salerno et al. 2004, pp. 79–80). Salerno et al. argue that Brazil has three conditions that facilitate industrial policy for automobiles: (i) the large size of the market, (ii) a strong niche market (cars of 1,000 cc) that can be exported to other developing countries, and (iii) a strong network of suppliers. In this view, MNCs do not impede industrial policy, but it does require MNCs to shift some product development and control to local subsidiaries.

This strategy, however, is not always feasible. In sectors where the technological gap between Brazilian companies and foreign multinationals is large, it is uncertain whether policies that benefit both can narrow this gap. For example, in nine technological subdomains, nonresidents account for over 80 percent of patents (Table 25.6). 13 Among these nine subdomains, only two (basic chemistry and surface treatment) are not directly related to emerging technologies (ICTs and health). Of the seven other subdomains, four are related to health (organic chemistry, pharmaceuticals and cosmetics, macromolecular chemistry, and biotechnology), and three are related to ICT (telecommunications, semiconductors, and computers).

### Table 25.6   Patent Applications by Residents and Nonresidents (2000–2005; percent)

Technological Subdomain

Percentage Nonresidents

Percentage Residents

Strong advantage of nonresidents

Organic chemistry

98

2

Pharmaceuticals & cosmetics

94

6

Biotechnology

91

9

Basic chemical industry

87

13

Telecommunications

87

13

Semiconductors

85

15

Computers

85

15

Surface treatment

84

16

Materials & metallurgy

80

20

Optics

78

22

Agricultural products & foodstuffs

75

25

Machines & tools

68

32

Motors, pumps, & turbines

67

33

Medical engineering

66

34

Mechanical components

64

36

Nuclear techniques

62

38

Audiovisual

62

38

Electrical components

59

41

Space & weapons

56

44

Analysis, measurement, & control

54

46

Transports

53

47

Environment & pollution

52

48

Maintenance & graphical

47

53

Thermal procedures

43

57

Civil engineering

37

63

Agricultural & food devices

32

68

Household consumption

26

74

Average

66

34

Source: INPI (Albuquerque et al. 2008).

The strong predominance of patents by nonresidents in advanced technologies (such as ICT) and emerging technologies (such as biotechnology and medicine) may create obstacles for Brazil’s diversification into new areas that industrial policy is intended to foster. Policies to promote innovation do not discriminate between foreign and national companies, and so the benefits may mainly go to MNCs and do not help Brazilian firms catch up with foreign firms in those sectors linked to advanced technology. For example, by the late 2000s, 71 percent of all incentives of the Good Law of 2005 had gone to only three sectors (and only a small number of firms within these sectors): automobiles (38 percent); oil and ethanol (23 percent); and transport equipment, including the airplane industry (10 percent; Zucoloto 2010). The second and third sectors have both MNCs and domestic firms, whereas the auto sector was mostly multinational.

In contrast, the policy to create Brazilian multinationals (national champions) does discriminate against MNCs. This policy was not initially part of the PDP and was only later revealed as BNDES policy when the president of BNDES, Luciano Coutinho, said that the bank would support the creation of “world-class Brazilian companies” (Carvalho 2009). In 2009 Coutinho stated:

I would say that Brazil needs to have world champions. For its weight, the Brazilian economy has unrivaled conditions of competitiveness in some chains. The country has already developed very competitive companies. . . . But Brazil has, relative to its size and potential, few world class companies. It is natural that in the expansion of these companies, the BNDES, under market conditions, is ready to support these opportunities. Obviously, there is nothing artificial in this process. . . . What exists is that companies that have proven to be highly competitive are supported by BNDES. It is part of the government’s industrial policy to allow the development of global Brazilian players, with worldwide scale.

(Romero 2009)

Beyond loans for international expansion, the BNDES often ended up participating in – and helping to structure – M&A operations and foreign acquisitions (see also Armijo 2017). The examples of this strategy are many. The BNDES actively promoted concentration and international expansion in the meat industry. Over three years, from 2008 to 2010, the BNDES loaned more than US$4.4 billion to JBS and also, through BNDESpar, bought shares in JBS (by 2010, it had a 17 percent stake). These loans were essential for JBS’s aggressive strategy of acquisitions, nationally and abroad, as it bought up companies such as Swift, Five Rivers, and Smithfield Beef in the United States, Argentina, and Australia, and as it acquired Pilgrim’s Pride, the largest US poultry company, in 2009. Later, with the purchase of Bertin, JBS became the largest animal protein company in the world. By the end of 2016, JBS had net sales of US$52.3 billion and more than 300 production facilities in Latin America, North America, Europe, and Oceania (JBS 2016). This was a meteoric rise. JBS did even not appear among the 400 largest companies in Brazil until 2002. Sales grew tenfold in the late 2000s, moving JBS up the rankings from 61st in 2006 to 5th place among all firms and 1st place among nonfinancial private business groups (see Lethbridge & Juliboni 2009). 14

In 2008, the BNDES structured the merger of BrasilTelecom and Telemar/Oi to create a national champion to compete with the dominant MNCs in telecommunications. Only after this operation was fully structured, with funding of US$1.5 billion from BNDES and US$2.5 billion from the Banco do Brasil, did the National Telecommunications Agency (Agência Nacional de Telecomunicações, Anatel) vote, narrowly, to relax antitrust regulations to allow the merger to proceed. 15 This episode clearly shows that the government chose to create a large national company in the telecommunications sector, and that this strategy was only implementable owing to the actions of two public banks, BNDES and Bank of Brazil. Moreover, a requirement made by BNDESPar was that it has priority in buying the control of the new company if the national controlling groups decided to sell their stakes in the future. Despite the government’s heavy support, the Brazilian telecommunications behemoth sufferedfrom high debt and poor management and filed for bankruptcy protection in June 2016.

Promoting national champions, of course, discriminates against MNCs. For proponents of using industrial policy to promote discovery, diversification, and upgrading into new activities, such discriminatory policies would make more sense if they promoted new firms (through, for example, venture capital) or new activities by existing firms. Instead, the national champions the BNDES supported were already large, competitive business groups in the booming commodities sector that could easily raise capital on their own in private markets. For instance, Vale and Petrobras are among the most competitive companies in Brazil and worldwide, and so it is not clear that they merited further public subsidy (after many decades of support in the 20th century), or that this public support would have broader benefits for the rest of the economy.

#### Autonomy, Partnership, and Transparency: The Relationship between the State and the Private Sector in the Creation of Large Business Groups

The government has used a variety of instruments – including credit and share purchases by both BNDESpar and state enterprise pension funds – to support large national companies. 16 Three characteristics of large companies show the strong relationship of these companies with the state. First, without exception, by the late 2000s all of the 30 largest Brazilian multinationals had received BNDES loans. In addition to loans, BNDESpar was a direct shareholder in 22 of these 30 companies. Second, adding the participation of state pension funds and even partnerships that Petrobras has with private companies among the 30 largest major multinationals, only 5 of the largest 30 firms (Tam, Globo, Copersucar, Natura, and AmBev) did not have a partnership with, or shares owned by, the government. In other words, more than 80 percent of Brazil’s largest multinationals were partially owned by, or in partnerships with, government entities. 17 Third, as we noted earlier, the BNDES worked consistently to promote concentration and the formation of globalized national champions.

How, then, can the government, and society more broadly, control industrial policy and the promotion of national champions to avoid what some critics call crony capitalism? 18 This is a major issue in the 21st century, as it was with industrial policy under military rule. The problem is not the granting of incentives, but rather the development of institutional mechanisms to ensure that incentives and subsidies are used productively and not to enrich (and, in a democratic environment, help to elect with illegal funds) a few at the expense of many.

Amsden (1989, 2001) argues that such reciprocity was crucial to the success of industrial policy in Korea. The state gave incentives to encourage the diversification of investment by large business groups, and, in turn, the subsidized business groups were subject to performance requirements such as export goals, which could be easily monitored, and, in some cases, targets for R&D spending.

Peter Evans (1995) highlights instead the network externalities of a close relationship between business and government that he calls “embedded autonomy.” The network of relationships with the business elite helps government officials to understand what kind of support the private sector needs and even what policies should be changed in order to increase the effectiveness of the support. The safeguard against rent seeking comes less from reciprocity and more from state autonomy. A Weberian bureaucracy, with staff recruited by meritocratic criteria and well paid, impedes business rent seeking and cronyism.

Finally, a third form of effective relationship between the state and business in the implementation of industrial policy can be mediated through business associations (Schneider 2004, 2015). Business associations can facilitate the disciplinary role of the state (reciprocity) by monitoring performance requirements for receiving subsidies related to industrial policy. Moreover, associations can help the flow of information between public and private sector (embeddedness) – thus creating the proper institutional environment for conflict resolution and consensus building. At the same time, these encompassing associations have incentives to minimize rent seeking. Additionally, the strengthening of these associations would be a natural balance to the excessive power of the state when it seeks to promote some sectoral activities and/or some economic groups and not others.

In Brazil, industrial policy lacks mechanisms of reciprocity or means for assessing the performance of subsidized firms. As we noted earlier, the targets in recent industrial policies were mostly economy-wide (investment levels or exports) or sectoral (amount spent on R&D, sectoral investment targets, etc.). Brazil’s industrial policy lacks anything resembling the reciprocity mechanisms for business found in Korea. This policy choice is better understood in the context of the revelations brought by corruption investigations, particularly the Lava Jato operation that started in late 2014. 19

Although one of the reasons behind different industrial policy experiments in Brazil has been the predominance of a developmental ideology and the benefits that such policies could grant to the PT constituencies, other motives drove the concession of benefits and subsidized credit. Given Brazil’s electoral system, a system favoring party fragmentation, the PT administration tried to hold its coalition together and raise funds for campaigns (legal and off the books) by extracting bribes from established big Brazilian business groups, such as JBS, Odebrecht, and Andrade Gutierrez. In fact, although policies were designed and publicly justified as developmentalist and countercyclical, they were shaped both by legal, transparent, and legitimate sectoral pressures and by promiscuous relationships between senior policy makers and politicians and business groups, oiled by kickbacks and bribes to approve favorable legislation and divert resources for coalition building.

The Lava Jato operation led to arrests and judicial convictions of several former directors of Petrobras, senior policy makers (such as former Minister Antonio Palocci), and executives from Brazil’s biggest business groups, such as Marcelo Odebrecht. Many, including executives from the JBS group, negotiated plea bargains by providing prosecutors with information about their illegal transactions and partners in exchange for more favorable sentences. 20 The Lava Jato investigation exposed the channels used by big Brazilian business groups and politicians to extract rents from public contracts, influence legislation, and obtain government favors such as tax breaks. Petrobras alone recognized losses of more than US$2 billion in bribes from overcharged contracts (Petrobras 2015). The total cost of corruption is still hard to quantify, as the investigation continues to unfold and expose misdeeds in other SOEs and government agencies. The renewed activism in industrial policy, thus, occurred in a context of widespread corruption. Still, significant variation existed in the capacity of contractors and politicians to divert public resources to private pockets – and, consequently, in the effect of corruption on policy choices. Within Petrobras, bribes varied from as low as 1 percent in the upstream, such as the local manufacturing of new oil tankers and platforms, to 3 percent in new refineries (Lima-de-Oliveira 2017). In the BNDES, according to the Federal Public Ministry, JBS had an agreement with the former head of the bank and later minister of finance, Guido Mantega (and Victor Sandroni, a broker), to pay kickbacks of 4 percent after large loan operations that supported the meat packer in its international expansion (Ministério Público Federal 2017, p. 155). In infrastructure investment, such as new stadiums for the 2014 World Cup and the expansion of Rio de Janeiro’s subway system, bribes reached 6 percent, benefiting mainly the governor of Rio de Janeiro and his political appointees (BRASIL 2017). Considering how broad industrial policy was, it is noteworthy that, for most sectors, there were no reports of kickbacks. Although it is impossible to say that other areas of the country’s industrial policy were immune to this quid pro quo, and it is probably unlikely, it would be a simplification to state that Brazil’s industrial policy was simple window dressing for corrupt opportunities. Industrial policy in Brazil is deeply rooted in its institutions and bureaucracy (Sikkink 1991) and is implemented mostly by career civil servants facing few direct political incentives. In part, the Brazilian case bears some resemblance to the relationship of autonomy and partnership stressed by Evans, which emphasizes a more interactive process in which the private and public sectors help each other, rather than having a formal mechanism of control, as highlighted by Amsden. But, even here, it is worth stressing, there are problems. For the most part, meritocratic criteria prevail in recruiting civil servants, but the competitive recruitment exams are based on general knowledge rather than specialized technical or sectoral training. There is not, for example, a process of systematic recruitment of experienced engineers to participate in the implementation and monitoring of industrial policy. On the contrary, the recruitment process favors training in the social sciences, especially law. Still, several agencies, such as BNDES, the Fund for Studies and Projects (Financiadora de Estudos e Projetos, FINEP), and Embrapa had highly qualified technical staff with deep industry-level expertise. The effectiveness of these agencies should signal the importance of highly qualified staff, which will be indispensable as the Brazilian state learns again how to intervene in the economy if it chooses to do so with similar emphasis as during PT governments. Finally, although Brazilian industrial policies included measures to enhance dialogue between the public and private sectors – competitiveness forums, development chambers, sectoral chambers, and thematic working groups – such forums, especially sectoral forums, fell dormant after a few years. 21 An important historical parallel between late 20th-century and early 21st-century industrial policy in Brazil is that the relationship between state and business occurred predominantly through direct, informal channels of communication that the corporate elite had with the state. This easy individual access of business to ministers, the BNDES, other agencies, and even the president remains a major hindrance to the strengthening of the role of business associations as conduits for dialogue between business and the state (Schneider 2015). Such access also favored the quid pro quo negotiations that were behind many deals uncovered by the Lava Jato operation in plea bargains. In sum, business–government relations in industrial policy are not governed by relations of reciprocity, embedded autonomy, or transparent, formal, organized dialogue. As a result, industrial policy is vulnerable to cronyism (Lazzarini 2011). In contrast to the 1960s and 1970s, many industrial policies now target large, existing, competitive firms, rather than new firms and infant industries. In general, subsidized funding for business groups “tends to protect established companies and hide subsidies” (Rajan & Zingales 2004, pp. 279–291). Industrial policies in the 2000s offered few means to monitor the distribution of subsidies, because the criteria used by the governmental agencies to promote concentration and internationalization of large firms are unknown. This had raised questions, among both firms and observers, as to whether some of the criteria were political (see Musacchio & Lazzarini, 2014, on campaign contributions and BNDES lending), a criticism that was later revealed by the confessions of businessmen and politicians to be (at least partially) true. Industrial policy now takes place in a much more open, globalized, democratic context. In contrast to military rule, policy makers are much more closely monitored, and often criticized, by the press and non-state stakeholders. And, compared with the 20th century, the openness of the Brazilian economy subjects companies to greater competition and freer capital flows that limit opportunities for the excesses of the ISI period. However, political and economic openness is not sufficient on its own to guarantee a transparent and productive relationship between the state and big business. #### Conclusion Industrial policy in the 2000s shifted from a more innovation-oriented, neo-Schumpeterian diversification strategy towards a more pragmatic, defensive, universalistic set of policies that support all sectors, especially already large and competitive firms. This shift was due in large measure to the political challenge of justifying an industrial policy (in an already diversified economy) and in a democratic context, where support for industrial policy was greater the more comprehensive it was. Brazilian industrial policy had broad support among business, precisely for not making choices. Democratic politics also led to an inherent contradiction in recent industrial policies, namely that the targets and goals are short term – dictated by the cycles – but real results can be evaluated only in the long term. This mismatch ends up hampering true evaluations of industrial policy. This is the case with Brazilian industrial policy, in which success indicators are limited to short-term, macro indicators (exports, investment rate, number of exporting companies, etc.) that do not reveal the real effort made in changing the sectoral composition and upgrading of Brazilian industry. Despite an apparent lack of focus and a public discourse that misleadingly emphasized innovation, a major thrust in industrial policies under the PT was, in fact, very strong support from the BNDES, mostly in commodity and natural resource sectors, for concentration, M&A, internationalization, and establishment of national champions with a large global presence. The M&A processes resulted in immediate gains for some businesses and industries and worked to consolidate the current productive structure and the insertion of Brazil into the world economy, based on areas of low and medium–low technology. Put differently, industrial policy usually signals what you want to be, but policies in Brazil consolidated what the country already was: a nation with a diversified industrial structure specializing in exporting low-tech goods. There is no easy solution to this dilemma, but at a minimum it merits more debate. It is not yet clear whether and how much the policy of promoting national champions in existing sectors had greater social rather than private benefits, and whether other possible industrial policies might have had greater, longer-term social benefits. Notwithstanding the fact that industrial policy in Brazil has been implemented without systematic evaluation and sunset clauses, its high fiscal cost has forced Dilma Rousseff’s successor, Michel Temer, to change its direction, despite criticism from industrial sectors (e.g., IEDI 2018). Many of the industrial policy instruments used by the previous governments have been retrenched, notably local content targets (such as those in oil and gas, which had minimum commitments reduced by roughly 50 percent for new contracts). In addition, subsidized loans to firms through BNDES credit declined from a peak of R$190 billion in 2013 to R$70.8 billion in 2017, the lowest amount in a decade (BNDES 2018). More than just a reflection of the current fiscal crisis and a lower demand for credit, BNDES’s role as the main tool for industrial policy through subsidized credit is set to change. A recently approved law (13.483/2017) changed its base interest rate from a politically defined one (the Taxa de Juros de Longo Prazo, set by a government committee and usually below the interest rate paid by the Treasury) to Taxa de Longo Prazo, which is based on inflation plus the yield on a 5-year government bond. Essentially, the law ended the implicit subsidy in BNDES’s operations by making all loans at least equal to the funding cost of the Treasury after a transition period of 5 years. The government will still be able to grant subsidized loans, but only after they are accounted for in the national budget, making them explicit (transparent) and competing with other priorities. Although it is too soon to assess the full effects of such changes, they are likely to lead to more public debate on the objectives of the country’s industrial policy and how much society is willing to fund it, as policy priorities (such as the promotion of national champions) will be evaluated side by side with social programs. #### Notes We are grateful to Robert Devlin, Barry Ames, and workshop participants at MIT and the Korean Development Institute for comments on earlier versions. We draw in this introduction on only some of the best-known and most-cited theories of industrial policy. For a full review of the literature on East Asian developmental states, see Haggard (2018). In addition, countries such as Korea, Taiwan, and India restricted the entry of foreign direct investment (FDI) into their economies (leaving more space for domestic firms to grow), whereas Latin America did not. See Amsden (2001). By the late 2000s, the benefits of close business–government collaboration in industrial policy became a near universal consensus among scholars and practitioners in multilateral development agencies. See Schneider (2015) for a review. Although Brazil in the 1990s embraced much of the neoliberal Washington Consensus, the government never ceased altogether using sectoral incentives. For example, the BNDES remained active, and the automotive industry received BNDES’s support in its restructuring process in the 1990s (in addition to other incentives and tariff protection). And, by the late 1990s, the government initiated some new sector funds (fundos setoriais) to promote innovation and expansion. Although not considered in this chapter, a fourth set of industrial policies promotes clusters of small- and medium-sized enterprises, often in the hope of generating positive externalities from spatial clustering. By 2016, Palocci was in jail, sentenced for his roles in the Mensalão and Lava Jato corruption scandals. Given its focus on promoting innovation, PITCE had the sympathy even of traditional critics of industrial policy (Canêdo-Pinheiro et al. 2007), who supported policies to encourage innovation as the social gains from innovation were higher than private gains. Although this new legislation was a major positive change, the budget for the program has been well below demand. From 2006 to 2011, the government disbursed innovation grants of US$882 million to 800 enterprises. The total expenditure is significant, but the average of US$1.1 million per firm is small (Almeida & De Negri 2010). The change in the composition of exports reflects changes in relative prices. From 2003 to July 2011, the price of manufactured exports grew 99 percent, less than half of the growth of commodity prices, as shown above. Regardless of the exchange rate value, the export of commodities became much more profitable than the export of manufactured goods, and China has become the main destination of Brazil’s exports. Trade between Brazil and China rose from US$7 billion in 2003 to US$56 billion in 2010; 84 percent of exports to China were commodities, and 98 percent of imports from China were manufactured goods. Additionally, 80 percent of Brazil’s exports to China in 2010 were concentrated in only three products: iron ore, soybeans, and crude oil. In 2012, for instance, five of the biggest wind-turbine makers were shut out of Brazil’s$3.5 billion market by BNDES after failing to meet local-content requirements.

Albuquerque et al. (2008) analyzed the patents by residents and nonresidents deposited at the National Institute of Industrial Property (Instituto Nacional de Propriedade Intelectual, INPI), the Brazilian patent office, between 2000 and 2005, using the technological subdomains defined by the Observatoire des Sciences et Techniques (OST) of France.

The five largest companies were, in descending order, Petrobras, Itaú, Bradesco, Banco do Brazil, and JBS. Petrobras and Banco do Brasil are state owned. The BNDES also had an important role in the sale of Sadia to Perdigão to form Brazil Food in 2009, the sale of Aracruz to VCP in the same year (leading to the company FIBRIA), acquisitions made by the food company Marfrig (which bought Keystone, the world’s largest supplier of various fast food chains), and successive capital injections and financing of Vale’s investment plan. All these companies are market leaders that internationalized rapidly with the aid of BNDES.

In addition to the loan of R$6.9 billion from public banks to enable the sale of BrasilTelecom to Telemar, the state pension funds (Previ, Petros, and Funcef) actively participated in the operation and owned up to 34 percent of the company. See Dieguez (2009) on the strong influence of the Brazilian government in the management of pension funds. The author describes in detail the role of Previ (the pension fund of Banco do Brasil) in retaking control of Brasil Telecom from the Opportunity group and its subsequent sale to Telemar. Almeida (2009, Table 8). For example, in 2007, Petrobras and Braskem, the largest petrochemical company in Latin America, entered a partnership to buy Ipiranga. See Rajan and Zingales (2004), who argue that relationship capitalism, as found in Japan and Germany (bank-based financial systems), protects established, mature companies at the expense of new, innovative businesses. See Netto (2016) for more information on the Lava Jato operation, and Paduan (2016) and Lima-de-Oliveira (2017) on corruption at Petrobras. In 2010, JBS/Friboi, one of the largest business groups (owing largely to BNDES’s loans and capital investment in 2008–2010), was the largest contributor to the campaign of PT candidate Dilma Rouseff. JBS/Friboi donated US$4.7 million to candidate Dilma Rouseff and US$20.5 million to all political parties. See www.tse.jus.br/eleicoes/eleicoes-anteriores/eleicoes-2010/prestacao-de-contas-eleitorais-2010 and Schneider (2013, chapter 7). In May 2017, key executives of the JBS group sought public prosecutors from the Lava Jato anti-corruption task force with a plea bargain that revealed payments of R$400 million in bribes to more than 1,000 politicians and civil servants, including supposed kickbacks in exchange for loans from BNDES (kickbacks that were under continuing investigation in early 2018). The plea agreement favored Joesley and Wesley Batista, brothers who controlled the business, by sparing them from jail time. However, the agreement was later rescinded, and both executives were arrested.

A good example is the competitiveness forums, which should have been working within the Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior, MDIC). As of 2009, the latest update of the web page on these forums was in 2004, which gives an idea of their irrelevance in public–private dialogue. See “Fórum de Competitividade” in www.mdic.gov.br (Almeida 2009).

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